Sometimes, life just gets in the way of being able to blog. For the time away, it’s been the result of building a new house, and going through the process of financing and underwriting a mortgage, along with the home improvement projects that come with the new digs. That said, understanding the mortgage process, and most importantly, repayment is the biggest financial decision of people’s lives. What most people don’t realize is, that with a bit of planning and diligence, you can make your way out of a mortgage much quicker than most people can even fathom.
Before we get too far down the rabbit hole, let’s understand that there are a few goals that everybody should have when they get a mortgage. The first is to get out of private mortgage insurance (PMI), which can raise your monthly payments by nearly $300-$400 a month, depending on the home and the mortgage that you have. The second goal should be to make sure you have a homestead exemption and assessment freeze on your property, as doing so will save you from increased property taxes, and could even result in reduced escrow payments. The third and final goal should be to pay down the principal of the mortgage by as much as you can each month.
While the first two goals are easily accomplished with a new appraisal and some paperwork, the third goal is something we like to call a habitual lifestyle change. Owning a home means you don’t have to worry about your rent ever going up, and your monthly expenses drop to just your property taxes and HOA dues, if applicable, once the mortgage is paid off. Knowing this, going in to the process, you have to prepare to make a pretty substantial monthly payment, and thinking about adding to it can be difficult at times. A better way to think about it is this: for the first year, every dollar you pay on your mortgage will yield almost four in returns as a result of fewer mortgage payments, less interest, and less mortgage insurance.
One way to look at the mortgage is basing projections off a higher estimate. As an example, if you got a rate of 4.5%, you could project your payments for a 4.75% or 5% mortgage, and use those as your baseline, or prepare for the 4.5% at lock-in time, and, if you are fortunate, see your loan drop to 4.25% before closing. The end result would see you paying a bit more each month, but allow you to ave a significant amount of money in the long term.