- A couple of millennials who paid off their mortgages 21 years early used the 1/12 rule.
- The strategy starts with a simple calculation: find one-twelfth of your mortgage payment.
- Then you pay that much extra every month, which is an extra charge every year.
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After buying a home in 2009, they soon began looking for ways to pay off mortgagestarting with increasing income and reducing expenses to make it more appropriate to pay off mortgages. They took on side activities, including music concerts for Marquez, paid off smaller debts and avoided precarious lifestyles so as not to spend more as their incomes grew.
Then they came across the 1/12 strategy. It soon became critical in their mortgage payment the journey they completed in 2017. Since then, they have turned the property into rentals in order to generate passive income…
Divide your mortgage payment by 12.
They found that the 1/12 Rule was an acceptable way to earn extra money. payments and progress on their loan.
“You take your monthly mortgage payment and divide it by 12. Add that to your monthly mortgage payment,” Marquez told Insider in an email.
For example, he continued: “If your monthly payment is $ 1,000, your 1/12 is $ 83. Then you make additional payment to your principal balance of $ 83. ”That $ 83 will be added to your monthly payment every month to get a new total payment of $ 1,083.
What you did with this calculation consists of the entire additional annual mortgage payment ($ 1000) in 12 installments ($ 83 each) making them easier to accomplish.
That $ 1,083 means $ 1,000 a month at mortgage principal (loan amount), and interest (the cost of borrowing that money) plus an additional $ 83 to the principal. Interest charges are calculated based on the remaining principal, so even a small additional payment can reduce the total principal, ultimately reducing the amount you will be paying as interest over the life of the loan.
However, according to Marquez, it’s important to check with your mortgage company before starting to make sure you are paying the right way. To save time, your additional payment should go towards principal, not interest.
Next: Make payments every two weeks
Marquez and Shira went further with this strategy, paying 1/12 of the payment biweekly and also switching mortgage payments to a bi-weekly schedule.
By paying bi-weekly, the couple made additional payments 26 times a year instead of 12, which – if we stick to our example of $ 1,000 monthly payments with a $ 1/12 payment of $ 83 – that’s an additional $ 2,158 per year instead of $ 1,000. This is the equivalent of more than two additional monthly payments.
By continuing to pay the principal and paying less interest over the life of the loan, you can shorten the years of the mortgage. The $ 100,000 mortgage with an interest rate of 3.5% will be repaid 13.5 years earlier, compared with 11.5 years if the payments were made every month.
You can also go a step further and automate these payments, making them easier to consistently execute. You can contact your bank and ask it to send money from your checking account directly to your mortgage lender, or you can contact your mortgage lender and ask them to withdraw money directly from your account.
By automating additional payments, you can start paying off your mortgage balance much faster, and you never have to think about an additional payment.