How to Cut 6 Years Off Your Mobile Home Loan Using Your Tax Return
Does this sound too good to be true? Well, it’s not!
If you’re like most of us, when you make a big purchase on credit, you have every intention of paying more than the minimum each month, right?
But most of the time things don’t quite work out that way.
- The car breaksdown
- The growing kids need new shoes
- And once again, Christmas snuck up quicker than expected
Finding even an extra $50 to put on a loan every month can be challenging which means the high hopes we have of an early payoff melt away like a popsicle in August.
Nowhere is paying your loan off sooner more beneficial than on your chattel or mortgage loan, and actually, it doesn’t have to be as hard as you think.
We just have to change our mindset a little bit.
The Breakdown of a Mobile Home Loan
When you finance a mobile home, there are a few different parts that make up your monthly payment:
- The principal (what you borrowed)
- The interest
- The property insurance
- And… you guessed it – the property taxes.
In most loan situations, your payments are mostly going toward the interest first with just a small amount going toward the “principal” (the original amount of money borrowed). Often it will take about 1/3 the life of the loan to pay down the first 1/5 of what you borrowed.
Here is a key point, extra payments at the beginning of the loan save you way more money than payments at the end of the loan.
If you make an early payment in month 6, you are saving interest on that amount every single year. In other words, if we pay $1,000 extra in year one, we save interest on that $1000 of principal in year 2, year 3, year 4, and all the rest of the years until the loan is paid off. If you make extra payments in your final year, you aren’t going to save much at all.
So, what’s the hack to pay the loan off early? Using your tax return, or really any money that you receive that is not part of your regular paycheck.
Use That Tax Return to Save Big!
Many folks get a tax return every year. If you don’t have a plan for what you do with that tax return, it seems to disappear like magic. If you have a plan for the tax return before you even start on your taxes, you are a lot more likely to make that tax return work for you. Make up your mind to do something with your tax return, such as, using an amount equal to your monthly home loan payment to pay down the principal of your loan.
One Extra Payment a Year
If you make just one extra home loan payment each year, you can pay your home off years early.
That’s right JUST ONE!
What is the impact of one extra payment a year?
Well, I am glad you asked.
Mobile home chattel loans tend to be financed for 23 years rather than the standard 30-year mortgage in traditional housing.
Here’s an example:
Let’s say you can expect $2,000-$3,000 per year on your tax refund. Subtracting just what a single mortgage payment would be and applying it to your home loan every year will save you dozens of mortgage payments!
When you pay early, you are not just making early payments, but you escape a whole lot of interest the bank wants to charge you. You may save up to 25% in your total cost of interest.
Who doesn’t love a 25% off sale?
When you prepay your loan, it is as if you are getting a sale price on the interest of your loan. Pretty cool, huh?
What Does Early Payment Look Like?
Okay, so what exactly does this look like? Here’s an Early Payment Example:
- Let’s say your total borrowed amount is $60,000 with an interest rate of 9% over 23 years.
- Without taxes and insurance your payment would fall right around $515.00 per month.
- Choosing to take that amount from your tax refund and apply it annually to your mortgage would cut your total loan down from 276 payments to 225 payments, or from 23 years to 19 years!
If you wanted to take it a step further, each year you could pay what your total mortgage payment is, including property taxes and interest.
This would mean paying around $800 extra per year, reducing your total number of payments to 204, paying your loan off 6 years sooner! And the best part is, you are not sacrificing your entire return, just a part of the return. You still get the rest of the tax return to spend on whatever you want.
Why Does it Matter?
Each year, you pay tons of money to your bank in interest for your loan. The sooner you pay off your loan, the sooner money goes into your pocket instead of the bank’s vault.
How much money can be routed into your pockets?
Well, let’s look at the same numbers we talked about above.
- A $60,000 loan at 9% interest over 276 months will cost about $82,000 above and beyond the amount borrowed.
- With your $515.00 annual payment you will save over $20,000!
- Upping it to that $800 annual payment your savings are nearly $30,000!
Even if you add only $100 each year to your mortgage you can save $5,000 and pay your mortgage off 1 year sooner. Those small early payments really go a long way, and it turns into money saved to put toward the things you want in life. Can you imagine a life without a large monthly payment?
So, go for it! Use that tax return this year to take a chunk out of that loan and save yourself a ton of money in interest over the life of your loan.
Originally published in February, 2019, we recently updated this blog to ensure the most relevant information is included.