I just sent in a final payment on my second mortgage of my primary residence. This was one of my 2013 goals that I set. I was able to pay off a loan balance of $55k in just six months.
Initially, in order to avoid paying PMI (mortgage insurance) , I got what is called an 80/10/10 loan. Basically that means an 80% first lien, 10% second lien and 10% down payment. Normally, in order to avoid paying PMI you have to have 20% equity in your property. If you are purchasing a property that means you need to make a 20% down payment. Well , one way around this is to secure a 2nd lien, to cover the remaining 20% of equity that you are not putting down. It was a way for me to get into the house I wanted much quicker and avoid paying PMI. I originally put down 10% and took out this second lien. I now have 20% equity in my home and only have a first lien.
Another reason I wanted to pay off this loan so quickly is that a 2nd lien is at a higher interest rate, this loan was at 7.39% which is really high. The only reason I took it out was that I knew I would be paying it off as quickly as possible.
This means I have eliminated a $380.35/month payment. If I had paid out this loan over the 30-year period, I would have paid an additional $80k in interest. My total interest paid was $1665.55 or 3% (approx 6% annualized).
I’ve set another goal to refinance this first mortgage into a 30-year fixed rate as close to 3% as possible (currently at 4.25%). If rates cooperate, I may be able to do this in the summer. This would save me close to $500/month.