How can you get three mortgage payments for the price of two? Let's say that some lender's chart or computer program says that you can afford a home for $300,000. What some people would do is go out and try to find the nicest home they could for right about $300,000.
You probably don't need to buy the most expensive house you can afford. In fact, with the economy we've seen the past few years - just because you can afford it now doesn't necessarily mean that you will be able to afford it a few years from now. (Especially if you are buying close to the top number the lender's software says you can afford.) Buying less home might make sense for you over the long haul.
What if instead of buying a $300,000 home you decided to set a target of $150,000. This might not work in all parts of the country. In my area (Indianapolis - Carmel Indiana) you could probably find a very good home in that price range. (That is because the area ranks near the top on affordability surveys. And also I have many times found newer homes for clients for quite a bit less than what other homes in the same area were selling for.)
Back to the three for two. Buy a home with a 150K mortgage, but make the payment on it that the bank just told you that you could afford: the payment as if it were a 300K mortgage. In other words, take the principal and interest payment on the 150K mortgage and double it. Pay that every month and you will be at a zero balance on your mortgage in about one-third the time compared to simply making the required lower payment. (And if you do run into an financial hiccup, you are only obligated to make the lower payment.)
So in very rough numbers, you make double payments for about ten years (20 years worth of payments,) and you are done. The regular payment plus the extra payment, if timed right means you don't have to make the third payment - three payments for the price of two. The amount of time to zero balance varies according to the interest rate. Take a look at this chart:
| Loan Amount | Interest Rate | Term Years | Monthly P&I Payment | Double P&I | Years to Zero Balance |
| 150,000 | 4.00% | 30 | $716.12 | $1,432.25 | 10.75 |
| 150,000 | 5.00% | 30 | $805.23 | $1,610.46 | 9.85 |
| 150,000 | 6.00% | 30 | $899.33 | $1,798.65 | 9.01 |
| 150,000 | 7.00% | 30 | $997.95 | $1,995.91 | 8.28 |
| 150,000 | 8.00% | 30 | $1,100.65 | $2,201.29 | 7.61 |
But even if you cannot afford to double your payment just add $100 to your payment every month for each $1000 of the loan amount and you can cut it down by quite a few years. (For a $150,000 loan amount that would mean paying an extra $150 per month.)
| Loan Amount | Interest Rate | Term Years | Monthly P&I Payment | Add $150 | Years to Zero Balance |
| 150,000 | 4.00% | 30 | $716.12 | $866.12 | 21.56 |
| 150,000 | 5.00% | 30 | $805.23 | $955.23 | 21.29 |
| 150,000 | 6.00% | 30 | $899.33 | $1,049.33 | 20.97 |
| 150,000 | 7.00% | 30 | $997.95 | $1,147.95 | 20.58 |
| 150,000 | 8.00% | 30 | $1,100.65 | $1,250.65 | 20.18 |
Paying extra on your mortgage might not make sense from a financial planning standpoint right away. You might want to be sure you have saved up some reserves and have paid down other higher interest rate debt before making extra payments on your mortgage. But when you are to zero balance, continuing to make the payment - this time to a mutual fund - can be a powerful way to build up some serious savings.
Please note the following: The above charts are for illustration purposes only. This is not an offer to extend credit. All items shown in the chart are approximate. Annual Percentage Rate (APR) will vary for your specific loan, Consult your mortgage lender for information about APR. Your lender may require additions to your monthly payment for property taxes, insurance and other items. Consult with your lender for additional details about the specific loans, rates and terms currently available.
Indianapolis-Carmel, Indiana real estate is one of the most affordable areas of the US according to recent surveys. Contact usfor information about finding your affordable home in the Indianapolis-Carmel Indiana area. (And yes, for even greater potential value, we would be happy to show you foreclosures, HUD Homes and short sales.)
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