Wonderful World of Mortgage Payments
Born in India, I was brought up in a society/ulture that never liked debt. Now living in the USA, I could not avoid debt for long time. I gave a tough fight but when I bought my home, I had to have a debt.
Surprisingly in the USA, there are two numbers very important for you: Naturally, the first number, is your Social Security Number and the second one is your average credit score. (There are three consumer credit rating companies so you have 3 credit scores as such but average score is the one that counts.). Social Security Number (SSN) is a boring number; once you get it, you are stuck with it for your life but credit score is a real fun game. There are so many strategies out there on talk-shows, in books, in magazines and on the Internet that teach you how to improve your score. There is one Credit Score expert around you wherever you happen to be- usually within 10 feet of you or only 10 digits away! Talk to 3 people around you in a gathering or at workplace, or talk to any 3 friends, and I bet you one of them would give you some solid tips on credit scores! I am just trying to highlight how much our attitude has changed towards debt.
Most of us living in the USA pay Mortgage payment every month. It is part of the American dream- dream of owning a home. That not only gives you a home, but helps American economy in a big way. When you purchase, usually 6% of that amount is paid to brokers, around $5000 gets paid in terms of closing costs to variety of parties, when you sell, there is another 6% paid to brokers, and then every year, around 1 to 2% gets paid in the form of property taxes to state and local governments. Knowing or unknowingley, each of home buyer is doing a lot of good to the American society and contributing his/her dues to maintaining standards of living in the USA. We embrace this mortgage debt on the wonderful selling point of Internal Revenue Service (IRS)- “deduction of mortgage interest”! This whole cycle works very well- for you as well as for others.
Anyway, the purpose of this page is to play around with some numbers and to do some financial math that can help you save some money.
TRICK 1: Mortgage payment voucher comes in the mail every month with a due date of 1st of the month but did you know that you usually get 15 days of grace period to make your payment? I believe most of us pay on the 1st itself. We don’t care of 15 days worth of holding onto our monthly mortgage payment. Now if you decide to delay your payment by 15 days each month, what kind of benefits do you have? Most of you would immediately tell me that it is not worth the trouble. But if you get into details, I am sure you will get surprised.
If you don’t care about paying 15 days late, I am sure you can stretch yourself and pay 15 days earlier too. I mean to say that if you are planning to pay your next mortgage payment on say 1st of May, please pay it on 15th of April instead and then on every 15th of the month. Now the payment you make on 15th of April, mark it as payment towards your principal. Do you know how much wonders this will do overall?
Let us run some numbers on the following scenario:
Assume this is your mortgage:
You are supposed to pay 2398 every month till January 2038:
Now instead of paying on the 1st, you change to pay it on 14th of the month and somehow squeeze in one payment by paying it early towards your principal.
Do you know that this “don’t care of 15 days” would save you full 5 monthly payments at the end? Plus, $2000 on the last payment you make?
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