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All the facts to getting
mortgage free
Dear Valued Client,
When you close your eyes, do you picture a life without debt -
without even a mortgage? For many people, owning a home is a
lifelong dream. For others, having a low interest rate mortgage is a
reward in itself, something that frees them up financially to invest
their money elsewhere. There's no single right answer for everyone,
but if you want it and make it a financial priority, a mortgage free
life is attainable.
For my Client Appreciation Program, I am sending you information
about prepaying your mortgage. Every month, I send Items of Value,
in the hope that you may find them useful. This month I have
provided some information describing reasons for and against paying
off your mortgage early, as well as some criteria for determining
whether prepayment is the right plan for you.
On the reverse side of this month's Item of Value are tips on what
to pay down before considering prepaying your mortgage. If you
decide you are ready to do this, there are also helpful tips on how
and when to make extra payments. By following these tips you can be
on your way to freeing yourself from that mortgage several years
early!
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The
PAYDOWN PAYBACK
Prepaying your mortgage can
save you thousands of dollars in interest. But could
you save more by investing elsewhere?
The decision to
prepay on a mortgage is both a financial and an
emotional one, and both elements can be confusing.
Many financial planners advise that there are better
places to invest your cash than in paying off your
mortgage early, and they've got a point. Do you have
debt in high-interest credit cards? Pay that off
first. Do you have cash set aside in an emergency
fund? Make that another priority. Are you
contributing to your 401(k) plan up to your
employer's match rate? consider making the most of
those tax-advantaged plans as well. Whether you
should prepay your mortgage depends on your
financial picture as a whole.
TO PREPAY OR NOT TO
PREPAY?
CONSIDER THE FOLLOWING...
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WHY? |
WHY NOT? |
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Guaranteed Returns -
If you have a fixed-interest
mortgage, you can always
count on the return of your
prepayment investment to
remain constant. If you have
the extra funds to spare,
but think the market is too
risky, it may be worthwhile
to apply that money to your
mortgage. |
Market Return - If
you can get a better return,
and you're willing to take a
long-term ride on the
market, it may be more
profitable to invest in an
index fund. As an example,
with a 7% 30-year mortgage,
and taking advantage of tax
deductions, any investment
that earns more than 5.1%
will provide a better
return. |
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Cancel Your Private
Mortgage Insurance (PMI) -
If you had to borrow
more than 80% of your home's
appraised value for your
mortgage, then you're
probably paying private
mortgage insurance, an extra
fee that could cost you as
much as $100 a month. By
making extra payments, you
can obtain the required 20%
equity in your home and
convince your lender to drop
the PMI. |
Interest Tax Deduction -
While making extra
payments reduces the
principal on your mortgage,
it also reduces the amount
of interest you can claim as
a tax deduction. If you're
in a high tax bracket, being
able to use this deduction
to lower your taxes might be
motivation to invest your
extra cash elsewhere. |
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Peace of Mind -
Paying off a mortgage is a
long-term financial goal for
some homeowners, and for
them, that peace of mind
carries an enormous
emotional value. Just make
sure that your high-interest
debt and retirement savings
are taken care of too. |
Prepayment Penalties -
Before increasing your
monthly payment amount, make
sure your mortgage does not
have any prepayment
penalties. While most
fixed-rate mortgages don't
carry such penalties, they
may be attached to
adjustable rate mortgages.
Talk to your lender for
details. |
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Retirement Beckons -
Paying off your mortgage
early can mean a big
reduction in living expenses
after you're retired. And
because you won't be forced
to tap into your retirement
savings in order to make
monthly housing payments,
you might be able to live a
little larger, or retire a
little earlier. |
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REDUCE
WHAT YOU OWE... |
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WHAT TO PAY BEFORE YOU PAY
DOWN: |
STRATEGIES FOR MAKING THAT
EXTRA PAYMENT: |
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High-Interest Credit
Cards - If your mortgage
rate is 7%, but your
maxed-out VISA accrues
interest at 18%, put your
money toward eliminating the
credit card debt first. |
Switch to a Bi-weekly
Plan - With a bi-weekly
plan, your monthly mortgage
payment is split in half and
paid every other week. Over
82 weeks, that means you'll
make 26 half, or 13 full
payments - a full extra
payment a year. There are
quite a few companies that
offer to "convert" your
mortgage to a bi-weekly, but
with a caveat: they'll
charge you and up-front fee,
plus addition smaller
service fees each month.
With a little
self-discipline, you don't
have to cough up these fees.
Read on... |
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Emergency Fund - Set
aside three to six months of
living expenses (a money
market account is a good
place for this) so that
you'll be prepared in a
worst-case situation. |
Make One Additional
Payment Each Year - Pay
yourself. Transfer your
bi-weekly payment into a
separate account, and then
withdraw your monthly
payment from that account.
Gradually, the additional
full payment will accrue,
and you'll also gain
interest on the account. |
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Build Your Retirement
Savings - Take advantage
of tax-advantaged plans like
a 401(k) or an IRA, before
taking the mortgage. |
Add to Your Monthly
Payment - Pay an extra
1/12 of your monthly payment
each month. For example, if
your monthly mortgage
payment is $900, divide that
by 12, and add that amount
to your payment. In this
case, you'd pay an
additional $75 each month,
or $975 total. After twelve
months, you'll have made the
equivalent of an additional
payment. |
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Other goals - Once
your debt, emergency fund,
and retirement savings are
taken care of, set aside
money for your other
financial goals, such as
creating a college fund for
your children, or starting
your own business. |
Use Your Refund, Work
Bonus, etc. - You can
always send a large check
over to your lender when
you've got the cash, such as
after you get your year-end
bonus. Just make sure that
you specify on the check
that the money is for paying
down principal, not for
future payments. |
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Pay What You Can -
Consider this: pay only an
additional $20 each month on
a $100,000 mortgage with
6.5% interest and you'll
save over $13,000 in
interest over the life of
your loan. |
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DO
THE NUMBERS
Plan on retiring in 10
years, and want to free
yourself of your mortgage
before the big day? Or would
you just like to know how
much of a difference adding
$25 a month to your mortgage
payment would make in the
long run? Check out this
mortgage calculator
to answer these burning
questions. |
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Oh, by the way...if you know of someone who is thinking of buying or
selling a home, and would appreciate the level of service I provide,
please call me with their name and contact information, and I will
be happy to follow-up and take great care of them.
Sincerely,
 Sherry
Rich, REALTOR(r)
Sales Agent, RE/MAX Hall of Fame
Accredited Buyer Representative, Certified Relocation Professional,
Certified Residential Specialist, Graduate REALTORS Institute
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