It’s Called Currency

I wish I could think of myself as a “homeowner”. That’s the label that supposedly fits, but the truth is that the bank that loaned us the money is who owns our house. One day, we will have paid off the loan and will truly own our home. And with some good money management, that day is drawing closer every month.

When we purchased our house, we had a small downpayment and couldn’t afford the payments on a 15-year loan, but we certainly didn’t want to spend the next 30 years paying off our home. So that we wouldn’t have to, we have been making an extra house payment every year from the beginning. This cuts nine years off the loan term and thousands off of the total interest we will pay.

It’s not painful, I promise. You don’t have to come up with the extra payment all at once. And you don’t have to sign up and pay a fee to start making split payments every two weeks. All you have to do is take the principal amount of your current payment (the total amount less any PMI, insurance, taxes or other amounts paid into escrow) and divide it by 12. That number is the extra amount you want to add when you write that check (or schedule the automatic payment) each month. For instance, if your base payment is $850 of your $1000 monthly payment, you’ll add $70.83 to each month’s payment. It applies directly to the principal amount of your loan and that’s what the interest is calculated on each year.

With our small downpayment came the “joy” of PMI (Private Mortgage Insurance). On most mortgages, once you’ve got 20% equity in your home, the PMI is no longer required. When we hit that threshold, we contacted the bank per the contract to have them stop collecting that amount. And, to ensure that everything continues to work in our favor, instead of reducing the total amount that we’re paying each month, we just continue paying the PMI amount toward our principal. I’ve not yet calculated it, but since it’s a little more than half of our 1/12th payment, I’m guessing it will knock another 4 or 5 years off of the loan. Without working at it, we’ve nearly turned our 30-year loan into a 15.

It’s true: small increases now can pay off with big savings later. Fewer than 3% of homeowners take advantage of this simple technique. Get started this month and plan on adding the interest payments you aren’t making in the future to your retirement savings instead.

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