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Should I pay off my mortgage early or Invest my money? - YouTube
Channel: Mortgage Education & Finance with Stephanie Weeks
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- Today's video is not
going to be a video talking
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about ways to save
money so you can come up
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with an extra thousand a month
to put towards your mortgage.
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There are a ton of videos
out there for that.
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Today I'm going to talk to you
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about creating an actual plan to
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pay off your mortgage early.
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A quick word of warning.
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This video might challenge
some of the ideas
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that you have already about
paying off your mortgage.
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I ask that you withhold
judgment and listen
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with an open mind until you hear me out.
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Okay.
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I've been doing this for 17 years.
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I know a thing or two about mortgage debt.
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I know a thing or two
about financial literacy.
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I want to begin by
reminding everybody that
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if you're thinking about
paying off your mortgage early
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you should first pay
off any consumer debt.
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You don't want to worry
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about paying extra towards your mortgage
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if you still have credit
card, debts, car payments,
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or student loans.
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Since your home is an appreciating asset,
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carrying mortgage debt
is a little different
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than consumer debt or
depreciating debt like a car.
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You also want to make sure
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that you have adequate savings
and an adequate savings plan
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for things like an emergency fund,
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upcoming college education, retirement.
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Maybe you've got kids that
are going to get married
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at some point.
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Sometimes people get
so focused on the fact
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that their mortgage is a debt
that they want to pay it off
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when they don't adequately have a plan
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for some of these other things in life.
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And we'll talk a little bit more
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about that when I give you
my biggest tip on paying
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off your mortgage early.
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Step one, make a clear plan.
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It might sound like a no-brainer
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but most people skip this
part and proceed blindly.
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And guess what?
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They make a lot of mistakes along the way.
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When making a plan to
repay your mortgage early
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you first want to familiarize yourself
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with the rules of the game.
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What does that mean?
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Call your mortgage company,
speak with your lender,
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find out and be sure what
the terms of your loan are.
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Specifically find out if your
loan has a prepayment penalty.
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They're not common but they do exist.
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This would be a fee for
paying your loan off early.
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Federal law prohibits prepayment penalties
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for many types of home
loans, like VA, FHA, USDA,
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which is also known as RD,
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as well as for mortgages
issued after 2014.
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These fees are limited to the
first three years of loan.
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And after that you're free to pay it off
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without full penalty.
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Again, it's not common,
but that does exist.
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Make sure you know what
you're dealing with.
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The next thing you want
to ask your lender is
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whether or not they allow you
to make additional payments.
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If so, how often?
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Is there a particular way
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the payments need to be made to ensure
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that the payment goes to principal?
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Remember, it's in the lender's
interest that you do not pay
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off your loan early because the
more interest that they make
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over the life of the loan,
it's more money they make.
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This is why there are
sometimes restrictions
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on how and when you can
make additional payments.
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It seems shocking but supposedly
a mortgage company actually
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does not start making
money off your mortgage
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until you've had it at least five years.
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They want you to keep it long-term
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because they wanna make
money on their money.
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They want to make money
on their investment.
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This information will
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and should also be in your loan documents.
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So you can find information there
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if you prefer not to call.
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Regardless of how you
get it understand please,
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what your lender will allow,
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what may cost you extra
when you're making that plan
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to pay off the mortgage early.
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All this information took a
long time to put together.
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So I'd really appreciate if
you'd hit the like button
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and support the growth of my channel.
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Thank you for doing that.
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Next let's discuss how to make
a smart plan that will pay
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off your mortgage early and
save you money in the process.
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We'll start with one of
the more common ones.
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And this is known as the
bi-weekly payment method.
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Have you heard of this strategy before?
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For those who haven't, let
me quickly break it down.
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Most people pay their mortgage monthly
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and most people get paid every two weeks.
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If you take your monthly mortgage payment
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divide it in half and pay
that amount every two weeks,
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you end up making the equivalent
of 13 monthly payments
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a year instead of 12.
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That results in paying off your loan early
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and saving thousands
of dollars in interest.
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Let's look an example,
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and I'll drop a link in the description
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for an easy to use online calculator
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where you can enter your loan terms
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and find out how this
plan can work for you.
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Let's say you have a loan and
the loan amount is $250,000,
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a 20 year term, and a 3% interest rate.
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The normal payment and
remember, this is just principal
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and interest I'm talking
about, I'm not talking escrows.
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That's $1,386 a month.
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Divide that in half, pay
$693 every two weeks.
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Just following that plan alone
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you would pay off your
mortgage two years early
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and save $9,317 in interest.
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That's a lot of money.
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Is this biweekly method
what I would choose to pay
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off my mortgage early?
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Actually, probably not.
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But I want to give you all the
options I can think of here.
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It will definitely save you money
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over the life of your loan.
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We just saw that.
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It will definitely shave off some time.
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We just saw that as well.
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And if you're someone
who wants to work this
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into their budgets, set
up automatic payments
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and then forget about it
so you know it's working
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saving you money in the background
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and it could be a good option for you.
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Before you do this make sure
this is what I always say,
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if you're going to switch to biweekly
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what I need you to do is
to please make a payment
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and then switch to biweekly.
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That way you're a payment ahead.
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This will keep from confusing
the lender and them thinking.
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You're sending a partial payment
because you're paid ahead.
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Alright, let's talk about
the next method for paying
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off your mortgage early,
which to me is a better option
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and that's making extra
payments towards your principal.
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So mortgages work on an
amortization schedule
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where your monthly payment
covers both interest charged
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and the principal balance
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or the amount you borrowed
that you're paying back.
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When you first start paying on a mortgage
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most of the monthly payment goes
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toward interest and a
little toward principal.
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It's very interest heavy in the beginning.
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But over time as you pay, they switch.
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So at the end of the
mortgage most of the payment
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is principal and interest
is the smaller portion.
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This is because you're
paying interest based
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on the principal amount
that's outstanding each
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and every month.
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If you do the bi-weekly payment option
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we just discussed for each
extra payment you make
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the bank will put some of
that towards the principal.
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And some of that towards the interest.
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However if you continue to make your
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monthly mortgage payment as
agreed upon in your loan terms
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you can choose to make additional
payments that you specify
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to the bank, to your lender,
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that are going towards principal only.
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Remember when we talked
about how you need to
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understand the terms of your loan, right?
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The rules of the game.
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Here's where that comes into play.
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Based on the agreement
you have with your lender
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find out if you can make these
additional payments monthly,
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quarterly, or yearly,
depending upon your goals,
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and your flexibility and
what you need to do when
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making that payment to
communicate that it is principal.
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It is not interest.
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It is not escrow.
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Let's talk about what a
difference this can make.
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You can find mortgage
calculators online that
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will show you how making extra
payments will save you money
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and reduce payment time.
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I'll put a link in the description below.
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Let's use the same terms above.
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Bi-weekly payments, $250,000 loan amount,
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20 year term, 3% interest.
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Remember we talked about that.
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The payment for principal
and interest was $1,386.
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Now, instead of biweekly,
what if we say we pay an extra
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$200 every month exclusively to principal?
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$200.
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By making that payment the loan
will be paid off in 16 years
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and nine months.
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That's three years and three months early.
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Remember, earlier, we were
knocking off two years.
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That saves you $14,558 in interest.
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That's a lot better than
a little over $9,000
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wouldn't you say?
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Next, have you ever heard
of recasting your mortgage?
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Most people have heard of
refinancing, but not recasting.
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As you probably already
know, refinancing is done
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when you want to apply for a
new loan, start your term over.
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Maybe you're taking out equity.
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Maybe you're just doing a
rate and term refinance,
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but you're looking for a shorter term.
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You're looking for a better rate.
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If you qualify for a
better monthly payment
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or a better mortgage rate,
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than refinancing could be a viable tool
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for paying off your mortgage early.
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There are fees associated with
this you want to consider.
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Often ranging between
two and 6% of your loan.
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While on the other hand
recasting your mortgage
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is when you pay a lump
sum toward the principal,
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then the loan is recalculated based
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on your current loan and loan terms.
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So your interest rate
in terms stay the same
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but the lower principal
means a lower monthly payment
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by recasting it, which
saves you interest paid
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over the life of the loan.
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There's usually a small
fee with this option.
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Sometimes not even a fee, but
it's significantly less in
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either instance than refinancing.
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And the process is much easier
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because you're not
applying for a new loan.
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See, recasting is a great option
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if you come into a sum of
money like an inheritance,
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a signing bonus, a sale
of another property,
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maybe your tax refund every year.
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Now, not all lenders offered a recast.
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Most of them do, but not all.
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Notes that are backed by FHA and VA
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typically are not eligible for recasting.
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Now you might be thinking,
okay, recasting sounds great
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if I'm looking to save interest
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and reduce my monthly payments
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but how does that help
me pay off my loan early?
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That leads me to my biggest tip
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for paying off your mortgage early.
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Don't pay extra towards your mortgage.
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Say what, I'm going to say it again.
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Don't pay extra towards your mortgage.
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You're probably thinking,
Stephanie, what did you just say?
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Did you forget this video's about
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paying off your mortgage early?
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Just hear me out.
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I promise this will
make sense in a minute.
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Let's imagine we have a homeowner.
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Let's call her Avery.
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She buys a house for $250,000,
3% interest for 20 years.
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Avery's smart, she's paid
off all her consumer debt.
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And she saved an emergency fund
for six months of expenses.
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And she's even started
saving for retirement.
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But after all of that she's
been putting all her extra money
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toward paying off her mortgage early,
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trying to become mortgage free.
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Let's say she's been doing this
by making an extra 500 bucks
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principal payments per month.
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That's a lot of money.
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This plan would save her $28,711
in interest over the life
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of the loan and pay her mortgage
six and a half years early.
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That sounds a great right especially
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to the two comparisons
we spoke about earlier.
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Well, let's say 10 years in
Avery has a terrible accident.
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She's been paying extra
500 bucks remember a month.
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So her mortgage is down and
her balance is only 50 grand.
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That sounds great so far, right?
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But this terrible accident
caused her to lose her income,
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spend her six months of savings,
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and still have medical bills piling up.
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If things are really dire
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and she finds herself unable
to make the mortgage payment
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her bank is actually incentivized
to pursue foreclosure
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because the high amount of equity
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which means they're going to sell the home
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and easily recoup their
full outstanding amount
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and then some.
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This is not a good spot to be in.
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We were talking about
a worst case scenario.
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We are talking about a
worst case scenario, right?
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But the point is that she's
been taking her extra money
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and giving it to the bank
to pay down that mortgage.
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Now, when something unforeseen happens
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she doesn't have money
when she needs it the most.
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It's all tied up in her home.
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As a lender I've seen this so many times.
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You have no idea.
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Now, again, you're probably thinking Steph
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I clicked this video
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for you to tell me how to
pay off my mortgage early.
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Are you seriously trying
to talk me out of it?
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No, no, no, I'm not.
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I'm actually one of those
rare lenders remember,
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thrilled when their clients
pay off their mortgage early.
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I'm telling you this story
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because I want you to be smart about it.
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There's more than one way
to accomplish your goal.
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If your goal is to pay
off the mortgage early
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paying any extra money you
can seems like the smart move
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but you have other options.
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One option is to pay your
monthly mortgage payment
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as agreed by your loan terms, right?
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And take any extra money and invest it
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in a way that will grow.
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Then you can use that investment to pay
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off your mortgage early.
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Let's say, instead of
making that $500 a month
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extra mortgage payment
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Avery put $500 into an S&P index fund.
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Granted the return of
these funds fluctuate
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but most investment resources will agree
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there's an average of a 10%
annual return over time.
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Talked about that in another video.
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This is a higher annual turn
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than the interest on our
mortgage, which is great.
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Most importantly, along
the way she's investing
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growing the amount she can
use to pay her for mortgage.
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Also, if something were
to happen she has access
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to those funds and can use them as needed.
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By maintaining control of your money
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instead of giving it to the
bank you're lowering your risk
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if something were to happen.
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This also allows you to take
advantage of tax incentives
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for the interest rate on your mortgage
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as you work to pay it off.
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Now, remember how I talked
about recasting a mortgage
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and I told you it could be a tool
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for paying your mortgage off early.
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Let me tell you how.
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Recasting your mortgage can be a tool
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if you want to use a combined approach
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to paying off your mortgage early.
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What this means is that you
can take your extra money
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each month, each quarter, each year,
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put it into an investment fund.
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But instead of waiting
till you have enough money
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to write the check and
pay the mortgage in full,
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pull out a chunk along the
way, pay toward the principal,
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ask for the recast.
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Recasting your loan will also
lower your monthly payment
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which can increase the
amount you're investing
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each month to work
towards that ultimate goal
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of paying your mortgage off early.
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On the other hand,
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if you're considering a
refinance as a possible avenue
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be sure to check out my
refinance tips for success
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where I explain the most
common mistakes people
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make when refinancing their home
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and get my best tips for
saving money in the process.
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I will continue to release videos
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with mortgage advice each week.
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Be sure to subscribe to the channel
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and turn on notifications
to catch the next one.
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Click this link to watch the video
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and I will see you there.
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