Hopefully youre getting a huge tax refund and are wondering what to do with it. Joe McMahon of First Choice Loan Services and I thought you mind find this information helpful. For more details, check out My Blog.
Mortgage Payment Strategies
Most of us would place a high value on the prospect of owing less on our home mortgage. Owning a home outright, or paying down a mortgage at a significant clip, gives us a level of confidence and security that goes well beyond the numbers.With that in mind, here is a breakdown of common strategies for paying down a home loan. For these examples, well assume that youve received a windfall of $50,000.
Recasting your mortgage with a lump sum payment
With a recast, you request that the bank recalculate (recast) your mortgage payments based upon your new principal balance after the payment. For example: a $50,000 payment on a mortgage with 4% interest would decrease the monthly payment by $239 per month for the remainder of the loan. With a recast:
- The monthly payment amount decreases
- The loan term remains the same
- The interest rate remains the same
Applying a lump sum payment without recasting
This case is simpler, you pay down your loan and lower the principal balance, but you do not adjust the terms of your loan in any way, so the monthly payment remains the same. The benefit here is that the amount of principal applied for each subsequent payment will increase, while the amount applied to interest will decrease, shortening the loan term. For example, assuming a $400,000 mortgage balance at a rate of 4%, a payment of $50,000 would lower the loan term by about 6.5 years. With a simple lump sum payment:
- You pay less interest over the course of the loan, thereby decreasing the loan term
- Monthly payment amount does not change
- The Interest rate remains the same
Paying extra principal each month or moving to bi-monthly payments
You have probably heard this before, but if you pay just one extra payment per year, you can significantly lower the amount of time it takes to pay off your mortgage. Or perhaps you would like to be more aggressive and pay off your mortgage in, lets say, 20 years. What you would need to do is determine the amount of extra principal to pay each month to achieve the 20-year pay off. It takes a bit of trial and error, but you can find this number by accessing a Good Mortgage Calculator. Once you find the amount, you just need the discipline to stick with it. By paying extra principal each month:
- The monthly payment amount increases (but you are paying these funds to yourself)
- You pay less interest over the course of the loan, thereby decreasing the loan term
- The Interest rate remains the same
I hope you find this information helpful. Even if your tax refund isnt $50,000 (although that would sure be niceJ), these scenarios will be the same.
Happy Spring!
JoeMcMahon Christine McCarron
First Choice Loan Services RE/MAX Unlimited
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