Mortgage Cycling - Advantages and Disadvantages
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Mortgage cycling has recently been marketed as a unique way to pay off your
mortgage early and build up equity at the same time. The basic premise behind
mortgage recycling however, has actually been used before. The main idea is that
you make additional payments to reduce the mortgage principal and therefore pay
off the loan early. The mortgage principal is the amount you owe, interest
payments are calculated according to the amount of this outstanding loan.
1. By reducing the amount of your mortgage principal you will significantly
reduce the amount of future interest. This is especially significant since if a
mortgage was to last 40 years most of the payments in the early years are mainly
interest, you do little to reduce the principal.
2. To make it easier to meet the 6 monthly down payments mortgage cycling
uses the technique of also taking out a home loan. This is just a standard load
guaranteed against the value of your house. The interest rate should be low
because it is secured against the value of your house. A careful use of this
extra loan enables you to make large lump sums towards paying off your mortgage
1. It is risky. To take an extra home loan means that if you unexpectedly
lose your job and canít meet your repayments your house may be at risk.
2. The advantages of paying off a mortgage early are overestimated. True you
may have less to pay when you are 50 but for most people there greatest period
of financial difficulty is the first years of a mortgage.
3. Suppose your current monthly mortgage is $1000 this is a lot, and nobody
wants to be paying that for 30 years. However in 30 years inflation will reduce
the real value of your mortgage payment. Assuming real wages rise (as they have
done in the past) it will be only a small % of your income in the future. Also
many people find that in the early period of buying a mortgage they may have
more bills like education for their kids, old student loans e.t.c.
4. Personally I would like a mortgage that lasts as long as possible, so I
can have more money now. But everyone is different, if you are in the lucky
position of having much spare cash at the end of every month then Mortgage
cycling may well be worth doing.
5. There are less risky flexible mortgages which donít require the taking out
of extra home loans.
About the Author
R.Pettinger is an Economics teacher at Oxford and writes
frequently on the UK economy and mortgages. He edits a site about
Mortgages including a guide to different types of mortgages.
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Article Published/Sorted/Amended on Scopulus 2007-04-20 08:18:02 in Business Articles