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Prepaying a mortgage – by paying extra principal on a regular basis – is an easy way to dramatically reduce the term of your loan. To show you exactly how dramatically, we have an example below that shows the impact of paying and additional principal payments with each scheduled mortgage payment. We have given you three scenarios to evaluate and highlighted the amount of the interest saved over the term of the loan. This is a simple but profitable habit that will save you thousands in interest over the (now-shorter) life of the loan.
Beware the "Biweekly" Scam
As a homeowner, it is inevitable (if it has not happened already) that you will receive an offer – possibly from your lender – to enroll in a biweekly mortgage payment program.
Here is how it works: instead of making one payment a month, you make a half-payment every two weeks. That’s 26 half-payments a year (or 13 whole ones). What they don’t tell you is that they are holding on to the extra money you pay along the way and they are simply making one additional payment at the end of the year. For this “service,” they are charging you anywhere from $250-350 or more as an upfront program fee and an additional $3-5 per installment payment. Guess what? You don’t need them!
Do it yourself and get the same results with no wasted fees! Just write a separate check each month for the extra amount you would like to contribute toward the principal. Be sure to write “Apply to Principal Only” in the memo section of the check so the funds get applied correctly. If you have an automated draft you can usually arrange for the additional principal reduction to be included with your regularly scheduled draft – check with you lender for more details.
Call us if you have questions, any other mortgage issues, or just want to say hi!
SAMPLE LOAN AMORTIZATION -
Loan Amount: $250,000
Interest Rate: 6%
Loan Term: 30 Years (360 months)
Principal and Interest: $1498.88
Total Interest Paid: $289,593.09
INTEREST REDUCTION SOLUTIONS
Example One – One Extra Payment Annually
- Additional Principal for term reduction: $124.91 (regular payment/12)
- New monthly payment: $1623.79
- Loan term: 24.6 years – shaves 5.4 years off the original loan term!!!
- Total Interest Paid: $228,554.61
TOTAL LIFE OF LOAN SAVINGS: $61,038.48
Example Two – One Extra Payment Annually PLUS $100 per month
- Additional Principal for term reduction: $224.91 (regular payment/12 + $100)
- New monthly payment: $1723.79
- Loan term: 21.7 years – shaves 8.3 years off the original loan term!!!
- Total Interest Paid: $196,624.98
TOTAL LIFE OF LOAN SAVINGS: $92,968.11
Example Three – One Extra Payment Annually PLUS $300 per month
- Additional Principal for term reduction: $424.91 (regular payment/12 + $300)
- New monthly payment: $1723.79
- Loan term: 17.6 years – shaves 12.4 years off the original loan term!!!
- Total Interest Paid: $154,819.56
TOTAL LIFE OF LOAN SAVINGS: $134,773.53
Use the calculator to the right to see exactly how much you can save.
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