Ask The Money Coach

Posts Tagged ‘home loan’

Is it a Good Idea to Pay Extra on My Mortgage for an Early Payoff?

Q: Is it a Good Idea to Pay Extra on My Mortgage for an Early Payoff? How Much Do You Advise to Put Every Month to Pay a $300,000 Mortgage Down in 10 Years?

A: If you can afford to do it, yes, it is a good idea to pay extra toward your mortgage and pay your house off early. The one caveat I would say, however, is to make sure that you’ve taken care of what I call “the financial basics” first. This means paying off excessive credit card debt, having at least a three month cash cushion set aside for emergencies, creating a will, and protecting yourself with both life and disability insurance. Once those things are taken care of, by all means, start throwing extra money at your monthly house note to own your home free and clear as soon as possible.

Paying Down a $300,000 Mortgage

You asked about paying “down” a $300,000 mortgage, and I assume you meant just that – paying a big chunk of it down, and not paying it completely off. If you acquired your home anywhere from 1 to 10 years ago, and got your standard 30-year mortgage, paying it off in just 10 more years would mean you’d likely have to nearly double your current payments. On the other hand, if you’ve owned the home for some time, and want to accelerate your payments so that you can, indeed, have it paid off entirely in 10 years, then that may be financially doable without such a huge increase in payments. One big variable in all this is also the interest rate on your home loan. Since I don’t know how any others facts outside of the payoff amount – $300,000 – and your desired time frame (10 years), I’ll briefly describe two payment options, and then point you in the right direction for further information, where you can run multiple scenarios based on your exact circumstances.

Mortgage Payments are Always Front-Loaded

According to Bankrate.com, to pay off in 10 years a $300,000, 6% home loan means your monthly payments would need to total $3,331. By comparison, a 30-year mortgage, also for $300,000 at 6%, would have payments of $1,799. But remember, mortgage payments are very front-loaded, so that you pay more in interest charges in the early years, as opposed to paying down the principal on the loan. In fact, after 10 years of paying on a 30-year mortgage, you’re likely to have knocked off just 13% to 17% of your principal balance. It typically takes about 17 to 19 years of paying a mortgage before your payments start being mostly applied to principal instead of interest.

Use Online Mortgage Calculator

Use this mortgage calculator on Bankrate.com: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx.

It will allow you to play around with different payoff scenarios for your mortgage. By doing so, you’ll see how many tens of thousands of dollars you can save by applying extra payments to your mortgage, and paying it off sooner rather than later.

Should we cancel our loan modification?

Author: The Money Coach

Q: We Started a Home Loan Modification in June. We Didn’t Have to Make Payments for 3 Months, Then We Paid Our Required 3 Trial Payments. Now After Many Calls, Faxes and Paperwork Requests, We Have Been Told for 2 Months That Our Loan is “In Review.” I’ve Heard That Others In Our Situation Have Received Foreclosure Notices or Had Their Credit Ruined. Should We Cancel Our Modification Before We Get any Deeper?

A: I would not recommend canceling your loan modification at this time. You have already complied with your bank’s multiple requests for income verification, documentation about your expenses, and other paperwork. Additionally, you have successfully completed what is perhaps the most important part of the loan modification process – the three month “trial period” in which you show your bank that you can make on-time payments with a mutually-agreed upon, reduced monthly note.

The Impact on Your Credit Rating

I know you may be worried about the potential impact on your credit – especially if the bank rejects your application for a modification. But the truth of the matter is that you’ve already been through a process where you did not make payments for three months (as the bank told you to do in order to qualify for a loan modification). If your bank was going to report you as “late” to the credit bureaus, they’ve probably already done it. So halting your loan modification would not “undo” any potential damage to your credit rating. You can and should check your credit files with Equifax, Experian and TransUnion to see whether or not your lender has reported you as having been late. If so, there’s really nothing you can do erase those credit blemishes. If not, count your blessings and try to be patient amid what I know is a very trying, overly time-consuming process. Unfortunately, with more than 3 million foreclosure filings expected in 2010, banks (and the government) are overwhelmed by the sheer numbers of people currently seeking home loan modifications.

Why Foreclosure is a Not an Imminent Threat

You also need not worry unnecessarily about an unexpected foreclosure notice. Foreclosure proceedings don’t happen overnight. And before banks begin the process of foreclosing on a home, they usually contact the homeowner many times demanding payment of what’s owed or what’s past due. In your case, you seem to have had many, many contacts with your bank and no demands for immediate payment or payment in full. So just keep doing what you have been to keep good records, document everything, and regularly check in with your bank for routine status updates on your application for a modified, reduced loan.

Even if the bank does surprise you with a nasty foreclosure notice (which doesn’t seem very likely), based on the other financial circumstances you described (namely, that you have recently began making your normal monthly payment), the fact that you have the financial ability to make your usual payment would help you to fend off a foreclosure proceeding and negotiate with the bank to stay in your home.

Ask The Money Coach

Posts Tagged ‘home loan’

Is it a Good Idea to Pay Extra on My Mortgage for an Early Payoff?

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Should we cancel our loan modification?

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