How to Pay off your Mortgage Faster without Spending an Extra Dime
Today, we are going to talk about how you can pay off your mortgage faster. This time, we’re going to leverage something that’s called an escrow account.
Let’s assume that you have your mortgage statement on your hands. You got a copy of your mortgage statement. Then, you have an amount that is due and let’s say that that amount due, for the purpose of this exercise, is $1,500.
You’re going to see something on that paper that says “Principal Plus Interest,” and then the amount will probably be something like $1100. Then, underneath that, you will probably see something that says, “Escrow.” Then, under escrow, what you will see is the remaining amount $400, which will make up for the $1500. Escrow is an account that the banks are setting aside so that you have enough money at the end of the year to pay for: property taxes, insurance.
Pay off your Mortgage faster: Why do they do that?
When you close in on a property, usually, on a traditional mortgage, what you will do is that you will buy a property with 20% down, and then the bank will finance the rest at 80%. That, in essence, what it means is that you are the owner of 20% of that property, and the bank owns 80% of that property because they’re giving you the biggest chunk of the money.
As 80% owners of that property, they want to make sure that the taxes and the insurance are taken care of. Why? Because you can’t foreclose on a property if you don’t pay your taxes. ‘Uncle Sam’ will always take priority over the bank over anybody else because you’re owing taxes. The government can have the right and the power to actually foreclose on your property.
They, as the owner of 80% of that property, want to make sure that that doesn’t happen, that all the taxes are taken care of every single year. Why do they want to make sure that the insurance is paid off? In the event of an accident. For example, your property catches fire, or, something else happens, they want to make sure that their asset is protected, and that they can get reimbursed by the insurance company.
In order to get reimbursed by the insurance company, they have to make sure that the insurance premium is paid off. You can actually do a lot with that escrow in terms of paying off your mortgage faster.
Here’s what you’re going to do:
- Some banks will require that you have a year full of payment history, so to speak, so that way they can see your behavior, they can see that you’re someone who’s responsible.
- Some other banks do take six months to check that behavior.
- Some others require that you stay on that behavior for at least two years.
It all depends on the bank that you have your mortgage with, but, for the most part, most of them are okay with you asking them to remove that escrow after one year.
Pay off your mortgage faster: Communicate with your bank
What you’re going to do after one year of evidencing that you are a responsible person and that you know how to manage money, because you’ve been making the monthly payments for your mortgage, you’re just simply going to either call the bank or you’re going to send them a letter.
You’re going to tell them: “I’ve had this mortgage for over a year, and so far, I’ve proven that I am responsible with my monthly payments, and I would like to request for you to remove the escrow payments from my mortgage account. I will prefer to make the escrow payments myself separately, and I would like to request that you remove the escrow for my monthly payments.”
What they’re going to do is that they’re going to investigate that, they will need to do a review internally to see if you actually can qualify for that.
A mortgage is not only a responsibility with the bank, but also with the Government
The whole process will take about a month or two. In the end, you’re going to receive a letter with the approval that your escrow has been removed. You can only receive that if you have never been late with any payments, and that you have been very diligent and making your payments on time. Assuming that you’ve been very responsible and that all of your payments are actually made on time, you finally got the approval to remove your escrow from your mortgage payment.
What happens after that?
what’s going to happen is, after you have that escrow removed, your new monthly payment, your new monthly due amount and your mortgage is going to be only $1100.
The bank from now on will only care that you made your principal and your interest payment every single month. Now you have an extra $400. Guess what you’re going to do with it, you’re just simply going to take this extra amount, and you’re going to reinvest it back into your monthly payments.
You’re actually contributing and making extra payments to your mortgage without having to come up with any additional money just by simply removing the escrow out of the entire equation. What does that mean in terms of annual amount? Take this $400 and multiply this number by 12. That means that every year you’re making an extra $4800 payment. That’s four times a mortgage payment. Imagine how fast you’re going to finish paying off that mortgage and the amount of money you’re going to save in terms of interest rates.
For those who don’t know what a principal means, it just simply means the amount that you own. Two things need to be clarified:
For example if you bought a house for $100,000, and you put 20% down, that means the bank financed $80,000 and it translates to you owing $80,000. That’s basically what the principal means, and then the interest, which it’s the amount that the bank is going to charge you in interest rates for having a mortgage.
“How do I take care of the escrow amount?”
It’s simple. Just use 0% credit cards. For those who don’t know what those 0% credit cards are, or the zero APR cards, they’re just simply credit cards that have an introductory offer.
For example, you have a Chase card, and then you apply for a Chase card that has a 0% introductory offer for 9 months or 12 months. What that means is that you’re going to use a card, you’re going to pay for the taxes and you’re going to pay for the insurance. You simply have 9 months to repay that debt, or 12 months, depending on the type of card to repay that debt, without having to worry about paying any interests.
The bank must verify several aspects to grant you access to this product
It’s an awesome tool that you should always leverage in your real estate investment. The taxes are usually due at the end of the year, and the insurance is actually due annually as well. Make sure you got those dates jotted down in your calendar, so you are never late. Otherwise, you could risk foreclosing your property.
Pay off your Mortgage faster: Where is the escrow number
The first thing you will see is the address and then your loan information, your due date, when is the mortgage due, and then the total amount due. Then, you will find a breakdown.
You’ll have the breakdown down, you will see the principal and the interests. After that, you will see the escrow. You, after six months or a year, depending on your bank, can call the bank once again and require to have that escrow removed, and therefore you will be solely responsible for taking care of the taxes and insurance on your own. Then, you will take the extra and reinvest it all the way back into the mortgage, and therefore reduce this principle by a much larger amount.
It’s a great methodology to take into account to help you reduce that mortgage faster and also save time as you do it along the way. This happens to be one of them, and you can save not just time but also money along the way.
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