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Don’t treat your mortgage like rent!

For many first-time buyers it is easy to get into a new home and a mortgage and continue to treat it the same way you did when you were renting. You can make a significant impact on how quickly you payoff your mortgage by just paying a little attention to it.

While renting you get into the habit of paying your regular monthly rent bill month in and month out.  With your mortgage it is important to remember that you have the opportunity to pay extra whenever you can.  Yes, I know paying extra never sounds like a great idea.  Trust me, in the instance it is a fantastic idea!

By making additional regular payments you can significantly shorten the time it takes to pay off your mortgage and therefore save yourself thousands of dollars.  When my wife and I bought our first house I was determined to pay off our mortgage as quickly as possible. Now you have to remember I am a bit of a fanatic when it comes to this kind of thing as I see the numbers day in and day out.  I knew that our mortgage was potentially going to be the biggest purchase of our lives (Yes, more expensive than our house if we took a full 35 years to pay it off).

We started with bi-weekly accelerated payments, that is we took the regular monthly payment (amortized over 25 years) divided that by two and made that payment every two weeks.  As any of you who get paid every two weeks knows, that means that there are two months out of the year where we were making 3 payments.  The net effect of this was to reduce their amortization to about 21 and a half years.

Once we got into the house I started looking for other ways we could cut expenses and increase our pay down of the mortgage.  We had a water cooler that we had brought from our apartment that cost us about $26/month, we also had those ‘free’ (for the first 3 months) movie channels that actually cost us almost $40/mo.  I called up the water company and asked them to come get the cooler. I then called up the cable company and cancelled those extra movie channels.

I then called the bank and increased our bi-weekly payment by $50 (now we were down to about 18.x years).

I was working for the bank as a mortgage specialist at the time and often had a tax refund. We took any tax refunds over the next 3 years and applied that directly to the mortgage each year (down to under 14 years now).

We had originally taken a 3 year term at 7.15% in 2000 and when it came up for renewal we were fortunate enough to obtain an interest rate of 4.49% for a new five year term.  My wife was all excited as she figured the new lower rate meant more disposable income every month. I said no way, it means we get to pay down our mortgage faster! Yes, she was very excited about that! We kept our payments the same as the previous term so now we were paying off a substantial portion of principal each month.  This combined with the application of more tax refunds left us in a spot where today (2011) we are now mortgage free!

Now you may not want to be quite as aggressive as we were, but the point is that with a little bit of effort and focus you can make a substantial impact on the amount of interest you pay over the life of the mortgage without significantly affecting your lifestyle.

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