Take my case for instance. When I bought my condo 5 years ago, I paid $290K for it, and at the peak of the market, its value approached $475K, but right now, it’s value is only appraising at about $250K. This sucks, because in order to refinance, I can only borrow 80% of my homes equity, or $200K if my home appraised at $250K exactly. The banks don’t take into consideration that I’ve been on time with ever mortgage payment over the last 5 years, and that I’ve even made extra principal payments in some of those years in order to accelerate my mortgage.

If you have enough equity in your house, now is the time to refinance, but if your home value has dropped, as most homes in the Southern California area have over the past year, you just may find yourself in a situation similar to mine – having your home refinance denied. It’s a very unfortunate situation when someone like myself who takes pride in having great credit has a refinance declined because of the current state of the market.

I’m currently looking at a couple other options that will help me get refinanced, and I’ll keep you all posted if I find a way to lower my interest rate.

Take my current home loan for instance – I owe about $235K. Let’s just compare a new 30 year fixed loan: one at 6.375% (my current rate) and one at 4.75%. At 6.375%, my monthly payments would be approximately $1466.86, assuming I didn’t have any points added to my loan for processing, paperwork, etc. At 4.75%, my monthly payments would be approximately $1225.87 – a savings of $240.99 per month. Over the course of a year, I’d be saving $2,891.88.

If refinancing is an option for you, take advantage of the low rates now! These 4% interest rates for home loans won’t last forever. Just hope that you’re not stuck in my situation of not being able to refinance – My refinance was denied!

Since the time of this writing, interest rates have shot up a bit to the 5% range. Still not too bad, especially if your current loan is in the mid 6% and above range. Best of luck to those of you who are looking to refi or get a new home loan.

Firstly, my wife and I decided to have custom closets installed in our master bedroom, and in doing so, I had to bypass an additional principal payment. This is a decision that we are still happy with because not only were we in need of some organization in our master bedroom closet, but it also will help to increase the value of our home when it comes time to sell.

Secondly, with the declining market, we do not have the same amount of extra cash lying around that we can use to make an additional principal payment. Over the past 3 months, my portfolio value has decreased by half. Thankfully, I’m only 30 years old, so I haven’t pulled any money out of the stock market, and in fact, I’ve recently started to put more money into the stock market, and will probably continue to do this as long as the Dow Jones remains below 10,000 points. If Warren Buffet is doing it, it can’t be a bad idea, right?

With the market the way it is now, I am left with the following question: Should I now put more money into the stock market, or should I return to making additional principal payments? This is a tough question, because the market still seems to be very volatile, even though this past week was mostly in the green, but making additional principal payments guarantees me savings on mortgage interest.

For the remainder of this year, I am going to bypass any additional mortgage acceleration payments and leave a majority of my extra money in high yield savings and money market accounts. If I see a good opportunity in the stock market, I may invest in some high dividend yielding stocks, but for the most part, I am just going to sit on as much cash as I can.

This post is just meant to detail and give some insight on the effect of making the additional principal payment last month, and how it effects this payment and all future payments toward my mortgage. My July 1st payment of principal and interest was $1,509.77. Of this amount, $1,248.60 went toward interest, and $261.17 went toward principal. I still have about 28 years left on my loan, so my payments toward interest will be quite high for a while longer, but without the additional principal payment, my next regular monthly mortgage payment would have been less favorable (though it is hard to become less favorable than 80% going toward interest). Here’s what the breakdown of my regular payment if I had not sent in the additional principal payment: $1,261.89 toward interest and $247.88 toward principal leaving me with a balance of $237,284, rather than my current mortgage balance of $234,770.

As I noted in previous articles, the amount of savings in interest expense in the short term really isn’t that great – only about $14 after 1 month, but over the life of the loan, it will really add up, and if I continue to make additional principal payments, it will add up even faster.

Stay tuned for an update on my next additional principal payment – I’m hoping to put earnings from this blog directly toward all of my additional principal payments.

Pros and Cons of the extra payment – Yes, it was tough sending in an extra $2,500, but it is great being able to look at my mortgage statement and to see the principal balance drop more in one month than it has in the past 10+ months. Stay tuned for more updates as I try to pay down my mortgage balance in half the time!

My June mortgage payment had already been made, but I still wanted to get in an additional principal payment prior to my July payment being made, so I wrote a check for $2,500 and sent it in today. This payment will basically be applied as additional principal to my June payment (as long as the receive and process it prior to my July 1st payment), so let’s take a look at what this will do to my mortgage balance and next months principal and interest payments.

Now, with the obvios fact aside that I spent an extra $2,500 on my June mortgage payment, let’s look at the resulting July mortgage balance and the resulting principal and interest payments. I’m decreasing the amount I’ll have to pay to next months interest by $13.28 – Yes, this is very small when compared to the $2,500 I just forked out, but let’s consider it over the course of the next year.

Assume I don’t make another additional principal payment, then I’ll be paying $14,857.40 just to interest over the next year, whereas if I had not made the additional principal payment, I would have been paying an additional $15,021.52 to interest over the next year. A differenct of $164.12. I still have 28 years remaining on my loan, so considering just a year is a very insignificant amount, but if we compare it to what I’ll pay to interest for the remainder of the life of my loan, that’s where we’ll see bigger savings. With the additional $2,500 principal payment, I’ll be paying $262,553.97 toward interest over the remaining live of the loan, and without the additional principal payment, I’ll be paying $274,772.74 to interest over the life of the loan. This is a savings of $12,218.77 – just for making an additional $2,500 payment today. More importantly, I’m also shaving 9 payments off of my mortgage, having my final payment of $373.92 coming due on 12/1/2035 rather than 9/1/2036.

Some of you may be asking yourselves, “Why would it matter when the additional payment is received, it gets applied either way, right?”. It does get applied to my mortgage balance either way, however, the reason that I want to make sure that my additional principal payment is sent in and applied prior to my next automatic mortgage payment is because it will help to decrease the amount of interest that is paid on all of my subsequent mortgage payments. Why is this? Let’s say for simplicitys sake that I have a $100K loan at 5% with a monthly payment amount of $536, and I’m going to send in an additional principal payment of $10K. If I don’t send my additional principal payment, about $120 will go to principal, and $416 will go to interest. However if I pay my $10K additional principal payment (I realize this is a large extra payment, but it just helps to illustrate a point), then my next regular mortgage payment will have about $375 go to interest, and about $162 go to principal. It basically reduces the amount of interest that you pay in the long run. In this example, I save about $40 on interest in one month, over the course of the year, that will add up to be about $500 saved in interest. It adds up, and obviously, the quicker and more drastically that you can lower your principal balance, the less money you’ll be spending on interest every month.

Will this work for everyone? Absolutely not. First, you’ll need extra money every month in order to be able to make extra payments. Secondly, there are people of the school of thought that you’re quite simply an idiot if you pay off your mortgage early because you’ll be losing the tax benefit of being able to write off your interest paid. I think its absolutely retarded to be excited about writing off your interest expense, but that’s an entirely different story.

I read an article awhile back that said if you want to pay down your mortgage in half the time, all you have to do is send in a payment equal to double the principal each month. So lets take my latest payment for instance: On June first, my payment amount was $1,791.57 – of this amount, $246.57 went to principal, $1,263.20 went to interest (a waste of money in my opinion) and $281.80 went toward my escrow account to pay for my property taxes. Let’s say that I wanted to pay my mortgage down in half the time, then I would simply have to double the principal amount from $246.57 to $493.14, bringing my total monthly payment to $2,038.14. Really not that big of a difference. I could simply make up this amount by not going to lunch everyday – figure I spend on average $10/day on lunch over 20 days, there’s $200 bucks right there. Almost the full amount that I need to make a double principal payment. Instead of changing my lifestyle though, I’m going to use the income generated from this blog (and some of my other online ventures) to make additional payments to principal.

To start this, I’m going to be sending in a large principal only payment in during the middle of June so that when my July payment is calculated, more of my payment goes toward principal since the interest owed will be calculated on a lower amount. During June, I plan to send in a principal payment in the amount of $2,500 + whatever other income I can pull from this blog during that time. The $2,500 is my 2007 tax return, and since I haven’t blown it on anything stupid yet, I figure that I might as well put it to good use.

Stay tuned for updates on my personal mortgage acceleration program as I’ll be creating posts once or twice each month detailing the benefits (and the perils) of putting extra money into my mortgage each month.

My first loan, the 3/6 ARM, adjusted to its maximum amount of 6.75% after its first adjustment period, and interest rates were still low, so I figured that it’d be a good time to combine and get into a fixed rate loan. I refinanced through Axcess Real Estate and combined both loans into one and decided to add an escrow account too. My new payment is $1,791/month, about $300 of that goes into my escrow account for property taxes. All in all, I’m looking at about $1,500/month for my new mortgage payment, as compared to the $1,250 that I previously had with my 3.125% 3/6 arm and my 15-year 2nd.

I’m going to walk you through the type of loans that I got, but keep in mind that I purchased my condo at the beginning of the upward spike in housing prices. When I bought in June of 2003, I’ll be honest, I thought I was paying way too much for a 2 bedroom, 2 bathroom condo, but if you ask me now, I’ll tell you that I bought at the perfect time. When I bought, I would have never imagined that the price of my condo would nearly double in the next 3 years, which it did, along with most other housing prices in both Southern California and across the United States. The price of my condo has fallen since the peak of the real estate spike in 2006, but if I were to sell today, I’d still be able to take quite a bit of equity with me. The thing to keep in mind while reading this article is that I was able to “weather the storm” and survive with my mortgage while many homes (both in my area, and around the United States) were falling into foreclosure.

I bought this condo for $290,000 with 10% down and 2 loans. My realtor was able to keep me out of having to pay PMI somehow by getting a 10% loan in addition to my primary 80% loan, which I’m thankful for to this day. My 10% loan was at a fairly standard rate of about 6% (I can’t recall now and don’t want to dig up the paperwork) so my payment on that was a little less than $200 per month. Now, my primary loan was the loan that could really get me into a lot of trouble, and it was loans like this one that did get many people into trouble. My primary loan was for 80% of the selling price – $232,000 and it was a 3/6 ARM. An ARM is an Adjustable Rate Mortgage and you can read about My Adjustable Rate Mortgage here if you’d like to read my post to get more details. Basically, a 3/6 ARM will stay at a starting rate for 3 years, then after 3 years it will adjust, and will also adjust every 6 months after that. So here’s the deal, with my 3/6 ARM, I got an initial interest rate of 3.275% through IndyMac Bank and my initial monthly payments were $1,017.25 – When combined with my 10% loan, I had a total monthly payment of less than $1,250 and I knew that my monthly payments should have been somewhere closer to $1,650+ per month on an 80% loan, and about $1,850+ on a 90% loan (which I had).

The Mortgage Crunch
When I purchased my condo in 2003, there were all sorts of clever loan programs that would allow people to purchase homes that were way beyond their means, and the problem was that most people just didn’t understand what they were getting themselves into. I think this is where most people got into trouble was in not realizing that they were eventually going to have to pay the adjusted rate on their Adjustable Rate Mortgage. That’s where I differed from most borrowers and first time home buyers. I approached the situation with the attitude “how good of a deal can I get for the first 3-5 years”, whereas others simply asked, “how big of a house can I possibly get into”. Many of those who stretched their income to the max to get into the best and biggest houses are now either out of the house through foreclosure, or struggling to make ends meet.