Mortgage Cycling Secrets Revealed
Posted: Sunday, June 25, 2006
by Steve Gillman
http://www.IncreaseBrainPower.com
Have you heard about mortgage cycling? Maybe you've seen the ads for books on this "secret technique" for paying off your mortgage sooner. Is there some useful information in them? Yes, especially if you are not familiar with the basic premise that you can pay extra principle every year and you'll pay off the loan sooner and save thousands on interest.
The safest way of "mortgage cycling" is to just put large lump sums of money towards your mortgage loan every few months to a year. Pay thousands of dollars extra per year, and you will pay off your loan many years sooner. No surprise there, right, but what if you don't have the hundreds of dollars a month extra needed to do this?
Money For Mortgage Cycling
Don't assume you can't come up with SOME extra money, at least each year. Some will say they can't, and yet still add hundreds of dollars per month to credit card payments from buying anything from expensive shoes to snowmobiles. There's nothing wrong with buying these things, but the choice is yours if you want to pay down that mortgage instead.
You can also pay off large chunks of principle by using your annual tax refund, insurance settlements that are not otherwise allocated, and any cash gifts or prizes you may receive.
How much sooner you can pay off your mortgage depends on how much extra you pay and when. The sooner you pay extra money towards the principle, the better. Let's demonstrate with a simple example, just making an extra payment each month.
Suppose you have a $160,000 30-year mortgage at a 7% annual interest rate. Regular monthly payments would be $1064.40. If you looked at your second payment you would see that it's composed of $932.57 interest and $131.83 principle (the amount you actually pay down the loan). Just add $131.83 to your normal payment of $1064.40, and you have taken an entire month off the time it will take to pay off your mortgage.
If you did this each month, you would cut the time to pay off your loan in half. The principle part of the payment would be growing with each payment, so the extra payment would be a little more each month (around $137 by the end of the first year), but hopefully over the years your income will rise enough to afford that. Consider that if you pay normally, your last year of the mortgage you'll pay $12,772.80 ($1064.40 x 12 months). On the other hand, pay about an extra $1600 that first year, in the way shown above, and you'll eliminate that entire last year - a savings of over $11,000!
Other ways to pay off extra principle need to be evaluated carefully. You could, for example, put a few thousand of your savings towards the loan now and save perhaps tens of thousands in interest over the years. However, will you then need to pay even higher credit card rates because you emptied your savings account and need some money? You could cash in stocks and apply the money to the loan, but will you be giving up a 9% return to pay down a 7% mortgage? You may also want to consider paying off any debts with higher interest rates before you apply extra money to your mortgage.
To keep it simple, set aside extra money every month and apply it to the loan. Then use any other money that may otherwise be squandered (like tax refunds). If you just do a few simple things to pay something extra on the loan each year, and you can forget about complicated mortgage cycling plans.
Steve Gillman has invested in real estate for years. To learn more, get a free real estate investing course, and see a photo of a beautiful house he and his wife bought for $17,500, visit http://www.HousesUnderFiftyThousand.com
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Top-level comments on this article: (2 total)My Gillman would be a bit more credible if he knew how to spell...the word in question is "principal", not "principle". Thanks!
Good read. I like the idea of doubling the principle amount every month to make the 30 year a 15 year. And if you go with a biweekly and do the same on a biweekly, I am guessing that it would be around 12 to 13 years. But the principal will increase significantly after about 10 years. But inflation adjusted and based on ones career growth, one may acutally be able to pay that principle in 10 years. The important point here is that most of the principle is backended and paying even small amounts of principle will decrease the loan by half.
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