Mortgage
Most homeowners approach the goal of outright home ownership-part of the every family dream- in a traditional fashion. They feel that saving mortgage interest and paying off the loan early is the best solution and is accomplished best by applying extra principal to the mortgage, usually with one of four methods (for an in-depth examination of each method):
- Biweekly payments - paying one-half the normal monthly amount every two weeks, which would result in twenty-six half mortgage payments, or a total of thirteen full mortgage payments in each calendar year.
- Doubling the principal - using an amortization schedule to calculate the amount of principal being paid, then paying double that principal amount with each payment.
- Target year - determining a year by which to pay off the mortgage, then calculating how much extra to pay toward the principal each month to have it paid for by that target year.
- Mortgage term reduction - reducing the terms of the mortgage from a thirty-year mortgage to fifteen-year mortgage, for example.
I contend that all four traditional approaches contain major disadvantage most homeowners don't consider. These disadvantage include:
- Losing control of your home equity.
- Increasing the after-tax cost of owning your home.
- Increasing your risk of foreclosure and, therefore, the risk of losing your equity.
- Dramatically reducing the return on your equity dollars.
- Decreasing your ability to sell your home quickly, at the best price, if needed.
- Unnecessarily extending the time required to become debt-free, thereby increasing your costs.
Please understand this article is not meant to advocate that people go further into debt. for more than thirty years, it is advised to get out of debt as soon as possible. However, it is advise you do so by using the widest method to maintain flexibility - a method not embodied in any of the four traditional methods just described.
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