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A New Mortgage Payoff Strategy

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Mortgage Payoff Stategy

When someone is trying to pay off their mortgage early, they usually choose a shorter loan term or make additional principal payments to speed things up. I started making monthly mortgage overpayments as soon as I bought my house a year and a half ago. So far I’ve knocked about $20,000 off my mortgage balance using this method, but I’m thinking about changing up my payoff strategy due to the looming threat of a recession. 

A few weeks ago I read an article from Forbes about a different way to pay off your mortgage early to reduce your risk. Instead of paying the bank extra money, you deposit the cash you would’ve spent on mortgage overpayments into a high-interest savings account. This prevents your money from being locked in “equity jail” where you can’t easily liquidate it. Then when you accumulate enough cash to pay off your mortgage, you simply write a check for the full balance. However, there are some pros and cons to this method. 

Pros and Cons of Stashing Mortgage Overpayments in Savings

The biggest benefit of stashing your mortgage overpayments in a savings account is that you maintain control over your money. When you make mortgage overpayments to your lender, your cash gets tied up in your mortgage. To access your money in the event of an emergency, you’d have to do a cash-out refinance or get a HELOC, which isn’t always possible. For example, if you lose your job, you probably won’t be able to find a lender willing to refinance your property. 

But if you put the money earmarked for mortgage overpayments in a savings account instead, you’ll be able to pull from it when necessary. If you get laid off or fall ill and deplete your emergency fund, your mortgage savings will provide an extra safety net. That way you can still pay your bills no matter what happens. This added liquidity reduces the chances that you’ll foreclose on your house if you fall on hard times. 

Higher Risk of Wasting Your Money

However, because your money will be easier to access, it will also be easier to waste. If you have $50,000 sitting in your bank account, it may make you feel extra flush. I know I feel richer when I have a high savings balance, which makes me think I can afford extra splurges. Many people make mortgage overpayments because it’s a form of forced savings. Since you can’t tap your equity easily, you can’t fritter that money away on unnecessary purchases. 

To prevent this from happening, you should keep your mortgage savings in a separate bank account and pretend the money isn’t there. Otherwise you may end up blowing some of the cash and jeopardizing your early mortgage payoff goals. 

Higher Interest Costs 

Another downside of stashing your mortgage overpayments in a savings account is that you may pay more interest over the life of your loan. I ran the numbers and compared the interest costs you’d incur if you made monthly overpayments versus one lump sum. 

The scenario I used was a $200,000 mortgage with a 4% interest rate and a 30-year term that’s paid off in five years. Assuming my math is correct, you’d pay about $17,300 more in interest if you saved your overpayments instead of applying them to your mortgage balance monthly. In the grand scheme of things, this isn’t a ton of money, but it’s still worth keeping in mind. 

Saving My Mortgage Overpayments For Now 

Paying off your mortgage is viewed as a low-risk financial strategy compared to investing in the stock market. But since I’m pretty conservative when it comes to money management, I’m always looking for ways to reduce my risk even more. That’s why I’m drawn to this strategy of saving my mortgage overpayments in a bank account to provide an extra layer of financial security and liquidity. 

I’m planning to implement this strategy at least until this upcoming recession is over. You never know how long it will take to find a job if you get laid off at the height of a recession. So having additional money on hand in case of emergency is never a bad thing when a downturn is on the horizon. Once the economy bounces back, I may reevaluate this strategy. After all, I don’t want to pay more interest if I don’t have to, or risk wasting my mortgage savings because they’re easily accessible. 

What do you think of this mortgage overpayment method? Would you use this type of strategy to pay off your debt? Share your thoughts in the comments below!

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How Your Driving Habits Can Impact Your Finances

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Driving is a necessary part of life for many people. But what you may not realize is that your driving habits can significantly impact your finances. From the amount of gas you use to the wear and tear on your vehicle, the costs associated with driving can add up fast. If you’re looking to save some money, it might be time to take a closer look at your driving habits. Here are six ways your driving habits can impact your finances.

1. The Amount of Gas You Use

One of the biggest ways your driving habits can impact your finances is the amount of gas you use. If you’re someone who likes to drive fast or doesn’t take the time to properly maintain their vehicle, you’ll likely find yourself spending more money on gas than those with better driving habits.

To save money on gas, it’s important to drive the speed limit and keep your car in good condition. This means regularly checking your tire pressure, getting tune-ups when needed, and avoiding sudden acceleration.

2. The Wear and Tear on Your Vehicle

Wear and tear is a normal part of owning a vehicle. Depending on how you drive, that wear and tear can be accelerated, which will, in turn, affect the value and lifespan of your car. For example, if you regularly drive on unpaved roads or drive aggressively, your tires and suspension system will experience more wear and tear than someone who drives more gently on paved roads. This can affect not only the value of your car when you trade it in but also the safety of your vehicle while driving it.

3. The Cost of Repairs

According to Global Market Insights Inc, the automobile collision repair industry was valued at more than $250 billion in 2020 and is anticipated to grow at a compound annual growth rate of more than 2.5% between 2021 and 2027. One of the main reasons for this growth is the number of car accidents that occur each year.

While you can’t always avoid getting into an accident, there are some things you can do to help reduce the chances of it happening. For example, driving the speed limit and being aware of your surroundings can help you avoid accidents. Additionally, keeping your car in good condition can also help reduce the chances of needing expensive repairs instead of just reasonably priced maintenance services.

4. The Cost of Insurance

Your driving habits can also impact the cost of your insurance. For example, if you have a history of accidents or traffic violations, you’re likely to pay more for your insurance than someone with a clean driving record. To help keep the cost of your insurance down, it’s important to practice safe driving habits and avoid accidents and traffic violations.

5. The Risk of Fines

Certain driving habits can also result in fines. For example, speeding, not wearing a seatbelt, and driving under the influence are all illegal and can result in costly fines. Not only do these fines impact your finances, but they can also add points to your license, which can lead to higher insurance rates. In order to avoid getting fined, it’s important to know and obey all the traffic laws in your state. For example, in California, the legal BAC limit is 0.08%. This means that if you’re caught driving with a BAC above 0.08%, you could be fined and even lose your license.

6. The Risk of Being Sued

Did you know that your driving habits could also put you at risk of being sued? For example, most motorcycle accidents are usually caused by distracted drivers, changing lanes without signaling, or speeding. If you’re found to be at fault in an accident, you could be sued for damages, which can have a major impact on your finances. To avoid being sued, it’s important to practice safe driving habits and always be aware of your surroundings.

By following these tips, you can help reduce the impact your driving habits have on your finances. Remember, your driving habits not only help with money management but also your safety and the safety of others on the road.