Four Mortgage Plans
Which One Is Best For You?
Though there are many different types of loan products, in the end, when it comes to financing a home (and other than paying cash for it) there are only four mortgage plans for you to consider. Let's take a look at all four.
- Principle and Interest Forever: The standard principle and interest mortgage payment, whether it is a fixed-rate mortgage or an adjustable rate mortgage requires you to
make monthly principle and interest payments for the term or length of the mortgage. The mortgage terms are anywhere from 10-50 years in length, with a 30 year mortgage being
the most common option.
The challenge with this repayment plan is: very few people will ever pay off their existing mortgage in full over the term of the loan. What most people do is buy-refi-buy-refi over a period of many years and never reap the advantages of home ownership and appreciation. They typically end up with a higher loan balance and start back over with another 30 year mortgage, thereby staying under the yoke and burden of the mortgage and lender.
While you may have an interest rate of 6%, in reality it only equals 6% if and when you pay off the mortgage after 30 years. If you pay off your mortgage in less time then the effective rate is less. But if you refinance your mortgage or move and acquire a new mortgage, then your effective rate is much higher. As an example: if you have a $200,000 mortgage at 6% for 30 years and refinance or move after 5 years, then your effective rate is now 103%.
This mortgage plan, in my opinion, is the worst plan of all. How can you do better with this plan?- Consider getting a shorter term mortgage. By going to a 15, 20 or even a 25 year mortgage you will save tens of thousands of dollars.
- Start putting something extra towards principle each month.
- What about a bi-weekly payment plan? I am not really in favor of these, because they typically cost money and that money could be going towards principle. Better to be disciplined to add the extra each month or make one additional payment per year. Example: Your monthly mortgage payment equals $1500 per month. To make one extra payment per year simply divide your payment by 12 and then add that amount to your monthly payment. In this case it would be $125.
- Principle and Interest Forever and Invest Discretionary Income: This plan is basically the same as plan 1, but in this case you take your monthly discretionary income and you invest it into a safe, conservative account (i.e. Mutual Fund, IRA, 401K, etc.). By doing this you can accrue money over time and then use that money to pay off your mortgage in a much shorter period of time. Plus you have the security of having money in savings if needed. This is a great plan and advocated by many financial advisors.
- Pay Interest Only Forever and Invest The Payment Savings: This plan is similar to plan 2, where you invest the money into a safe, conservative account (i.e. Mutual Fund, IRA, 401K, etc.). Depending on your particular monthly savings, you could accrue enough over time to pay off your mortgage 5-15 years ahead of schedule. *While plan 2 and 3 can be very advantageous financially, the challenge that most people encounter is actually following through with it over a long period of time. If you are disciplined, then either plan 2 or plan 3 can be a good option for you.
- Pay Principle and Interest (or Interest Only) and Incorporate an Equity Accelerator Program: There are several great benefits to this plan.
- Because you use a software program, it holds you accountable and tracks your progress. Plus it has a feature that will show you how much it will cost or you will lose by making discretionary expenditures. Example: Perhaps you decide you want to buy some new patio furniture and a grill and their cost is $6000. Well that $6000 you are going to spend on the new patio furniture and grill could save you three times that in interest on your mortgage.
- It will typically allow you to pay off your existing mortgage in 1/3 to 1/2 the time, with little or no change to your current lifestyle.
- It can also help pay off other debt (like car loans, student loans and credit cards). It is a great plan for getting TOTALLY DEBT-FREE!
- Then when your mortgage is paid off early, you can take the payment you were paying towards your mortgage and invest it into a safe, conservative account (i.e. Mutual Fund, IRA, 401K, etc.).
- What is also great about this plan is you RAPIDLY BUILD EQUITY over a few years and then you can REINVEST EQUITY for retirement, a college savings plan, an investment property or a second home.
The bottom line for any of these plans is to get out from under the burden of mortgage debt and not remain unequally yoked with the secular lender.
"Banks lend by creating credit. They create the means of payment out of nothing." – Ralph M. Hawtrey, former secretary of treasury, England