After six years, Olivia Brigman sold her first home. And she was well on her way to paying off the $56,000 mortgage with an 8% interest rate in about half the scheduled time. That’s because Brigman, who was single when she bought the three-bedroom, two-bathroom home in San Antonio, paid $100 extra toward the principal as part of her mortgage payment each month.
After she bought the house at a Veterans Affairs foreclosure in 1993, she created her own accelerated payment plan by giving her lender written instructions to automatically draft the extra $100 from her bank account. At the time, Brigman, who works as a physical therapy assistant, was hoping the extra payments would result in her having more equity to roll over into her next home. It worked.
Brigman, 47, and her husband,
Joseph, a 61-year-old parole officer, financed $147,000 of the $167,000 price of their new home — a 2,450-square-foot, four-bedroom, three-bathroom house they built in Schertz, Texas, in 1999. Much of the $20,000 down payment and closing costs came from the equity from the sale of Brigman’s first home. “Automatic withdrawals were a big plus,” she says. “With the money automatically taken out, it was not there for me to spend.”Brigman chose to pay extra on her 30-year mortgage, configuring payments that fit her budget, instead of having to make higher payments on a 20-year or 15-year mortgage, which may have been a financial hardship. “It made the payment scale more comfortable, so that we were able to do it our way without pressure,” Brigman says.
The money she saved is significant: By making the
equivalent of two extra payments a year, Brigman was on track to have her first house paid off in 17 years, paying $44,883.21 in interest versus the $91,924.83 she would have paid had she stuck to the 30-year payment plan, according to an amortization calculator at www.eloan.com.Homeowners don’t have to make large extra payments to see a significant impact on their overall finances. Paying just one extra monthly payment each year reduces a mortgage by seven years, says Lisa Bouldin-Carter, national executive director of Cincinnati-based BorrowSmart Public Education Foundation. “A lot of people piddle around with regular payments that build equity slowly. But equity is the difference between what you own and what the bank owns,” she says. “People start businesses with equity, send their kids to college with equity, and take care of elderly family members with equity.”
Some mortgage companies offer biweekly payment or extra bank draft options for a set-up fee and monthly administrative fee. Only people who have problems making the extra payment themselves should use the paid service, says Pamela Callies, a real estate broker with New Home Realty in San Antonio: “If you are not a disciplined person and need structure, it’s a good idea. The benefit of saving thousands of dollars outweighs that little fee they will charge you.”
However, before deciding to pay off a mortgage faster, homeowners should consider the tax implications of losing mortgage interest payments at a faster than normal rate. Mortgage interest is deductible on federal income taxes. Callies bought several investment properties through accelerated payment plans, but she is paying the mortgage on her current primary residence according to the original amortization schedule to keep one tax deduction.
But Charles Ray, a real estate broker who teaches real estate investing classes with Silver Dollar Realty in San Antonio, says it’s better to get rid of a mortgage, freeing up money for other investments: “If you are in a 33% tax bracket, only one-third of the interest you pay is deductible. And if you are in the 15% tax bracket, it’s even less.”
How to Pay Off Your Mortgage Faster
- Make one extra monthly payment each year
- Round up your monthly payments to the nearest $10 or more
- Put one-third of your income tax refund on the principal balance
- Skip one discretionary expense, such as a lunch or video rental, and put that money on the principal balance
SOURCE: LISA BOULDIN-CARTER, BORROWSMART