Accelerating Your Mortgage Paydown

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Have you ever wondered how much you’re paying back to the bank over a 30-year mortgage if you make the minimum monthly principle and interest payments? It’s not as much interest as it was decades ago when mortgage interest rates were higher, but it is still substantial. As an example, let’s say you have a $300,000 mortgage at a fixed rate of 5%, making your payments at about $1,610 per month for principle and interest. If you were to make the minimum payments for all 30 years, you’d pay the bank back about $280,000 in interest – almost double what you originally borrowed. If you were to use various strategies to accelerate the principle paydown of the debt, it wouldn’t be that high.

Using the above example of the $300k mortgage, look at a sample amortization table online for this hypothetical loan. Your monthly payments on this loan will be $1,610. For payment #1, the $1,610 is broken down as $1,250 interest and $360 principle, for payment #2, $1,248 interest, $362 principle, payment #3, $1,247/$363 is the split, payment #4, $1,245/$365 and payment #5, $1,244/$367. These are the details of the first five payments of the loan. The amortization is designed so that the interest the bank is owed is built into the front end of the loan period. On a 30-year mortgage, it takes about 16 to 17 years for the interest and principle part of each payment to equalize (the breakeven point).

Here is one strategy: When your first payment is due, you can remit just the minimum amount of $1,610 (and do that 359 more times). Or, you can send in the $1,610 for the first payment and add to it the exact amount of the next principle payment. (The principal amount for payment #2’s is $362.) In this case, your total payment would be $1,972 ($1,610+$362). If you wanted to be more aggressive and had the extra cash, you could add more principle payments to your base payment. (The next 4 principle payments would total $1,457.) What you are doing when using this strategy is moving further down the amortization table more quickly so you can reach that breakeven point faster, thereby applying more toward the principle with every payment. You are also saving the applicable interest amount for each line of principle paid. For example, if you add the one extra principle amount of $362, you can cross that line off your amortization table and you will have saved the $1,248 interest associated with that line. So, your return on a $362 payment is $1,248. Not a bad return! If you added the next four principal payments of $1,457, you’d save $4,984 of interest!

There are other strategies, such as bi-weekly mortgage payments and extra payments once per year, among others. Of course, you need to have the extra post-tax disposable income to apply to the mortgage, but it is a good investment that will pay dividends sooner in the form of increased equity. In other words, Before the breakeven point, more of each payment is applied towards interest and after the breakeven point, more of each payment is applied towards principle.

For your mortgage, you might want to examine the entire 360 payment amortization table which was likely provided to you at closing. As our example here illustrates, if you have the disposable cash, taking a large bite out of the interest-apple at the beginning of a mortgage makes good financial sense for the long term.

For more information, write Glenn Nevola – www.flightlinefinancial.com

SOURCEAero Crew News, January 2019
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Glenn Nevola
Current airline captain and also financial advisor specializing in providing financial assistance to fellow airline pilots in their pre and post retirement planning. Glenn Nevola has been an airline pilot since 1986 where his career started with People Express Airlines, which merged with Continental Airlines in 1987 and was then merged with United Airlines in 2010. He is currently based in Newark as a 737 captain. In addition to being a pilot, he operated the financial arm of a real estate firm that purchased, renovated, rented, marketed, bundled and sold to investors over a 12-year span. He was personally responsible for over 300 closing during that timeframe. More recently he was a former financial advisor with Morgan Stanley in NYC where he acquired his Series 7 and Series 66 licenses. He brought over to the firm a concept and business model that would assist retiring airline pilots with post - retirement wealth management. This was, in part, augmented by the fact the mandatory retirement age was recently changed from age 60 to age 65 for commercial airline pilots. When Morgan Stanley hired him, the oldest of these pilots were then approximately 63 years of age. His unique position of living in both worlds – flying and finance - provided him the ability to market to his niche in direct target marketing from one of their own. He also has skin in the game, as he is a pilot, who participates in the retirement plans on which he advises and as such is in similar models as many of his clients. As time went on at Morgan Stanley a decision was made, based on many factors such as compliance restrictions, inability to market and assist younger pilots with their desire for 401(k) management and general restrictions on building out the business model, to split off and create his own financial services firm, Flight Line Financial, LLC (FLF) – a registered investment advisor based in NJ. FLF is also licensed in NJ for insurance enabling the firm to provide annuity counseling. This created a win - win scenario for further growth by allowing FLF to focus on 2 distinct groups of pilots – younger pilots, less than age 59 ½ and older pilots over age 59 ½. For the younger group, FLF provides asset allocation strategies incorporating diversification, dollar cost averaging and rebalancing options to pilots for a flat annual fee. Also discussed with this group includes topics such as Roth vs. non-Roth, 529’s, max contribution limits, 415 (c) limits, spousal accounts and other general financial topics. For the older pilot group, FLF has affiliated with a leading wall street firm for post-retirement financial planning. Wealth management services provided include many aspects such as creation of post retirement financial distribution plan, trust and estate planning, diversification, allocation, hedged equities, bond structuring, long term care, etc. The firm FLF is affiliated with has been in the wealth management business since the 1970’s and manages over $2 billion in assets from individual investors. Glenn has the unique position of living in both worlds – flying and finance. He interacts with his target market every time he is at the airport or on a trip. In numerous businesses, owners pay substantially for leads in their specific target market, such as mailing lists, calling lists, email lists, etc. Additionally, servicing the younger pilots creates pipelines for future rollovers. Currently FLF manages approximately $250 million in assets across approximately 200 clients.

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