10 Mysteries Solved for Photographers Who Want to Pay Their Mortgage Early!
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1. Although paying a mortgage earlier than the life of the loan may make sense for most photographers, it is not necessarily a sound financial decision. Before making any changes to how and when you pay your mortgage, you must determine if it is a good choice, in terms of your age, income, where you live and other factors.
2. For example, do you have the cash assets to increase the amount of your monthly mortgage payment? The cash you put into your home does increase its equity, but it may be more difficult and cost substantial fees to borrow cash from the equity if you need it.
3. Another factor is the rate of your loan, many of which are currently at all-time lows. A better financial decision may be to eliminate all high-interest-rate debt first, such as credit cards, before paying more towards your mortgage.
4. You don’t want to pay your mortgage early if it means you’re neglecting other long-term financial obligations, such as adding to your 401k or other retirement vehicles, a child’s college education fund and/or an emergency savings account.
5. You must also take into account the current interest rate you are earning on IRAs, certificates of deposit and savings account. If buying a CD will only earn, for example, .5% interest, and your mortgage has a 5% interest rate, then a better use of your cash may be to pay more towards your mortgage than buying the CD.
6. Taxes are another mystery (they’re always a mystery!). For example, it may help your overall financial situation to increase your mortgage payments, so you have more of a mortgage interest payment deduction, which will reduce your federal income taxes. This could be helpful if you are earning additional income from photography.
Then again, the sooner you pay your mortgage, the sooner you lose the interest payment deduction.
7. If you determine after careful consideration (and with the advice of a tax accountant) that paying your mortgage early is a good solution for you, then the simplest method is to make additional principal payments. Remember, for the first several years of a mortgage, most of your total payment is applied to the interest, so 70%, 80% or more of your monthly payment is interest and the small additional percentage is principal.
You can request an amortization chart from your mortgage lender that shows how each month’s payment is divided between principal and interest. Increase your payment this month by the amount of next month’s principal portion, and your mortgage will be paid early.
Read the fine print in your mortgage or contact the lender to determine if advanced principal payments are allowed, and without any penalties.
8. If paying additional principal every month strains your budget, then another trick is to round up your payment. For example, instead of paying the $812 due every month, remit $820. According to various mortgage calculators, an extra $6 per month on a $200,000, 30-year loan could eliminate the last four monthly payments of the mortgage.
9. Another solution to the early-mortgage-payoff mystery is to refinance for a mortgage of fewer years. Thirty-year mortgages have been the traditional length, but refinancing for a 10-, 15- or 20-year mortgage could be your best strategy, again, depending on your income, financial and tax situations. You want to be sure that you can afford to pay the additional amount every month with a shorter-term mortgage.
For example, you’ll pay $537 a month for a 30-year, $100,000 loan at 5%; however, for a 15-year mortgage at the same rate, your payment is an additional $254, or $791 a month. This is a 47% increase.
10. Another simple solution is to make bi-weekly payments instead of monthly payments. By paying half of your monthly mortgage payment every other week, you have, in effect, made the equivalent of 13 monthly payments in a year.
Again, check with your mortgage lender that they will accept this payment arrangement and make sure the extra amount is applied to principal.
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