How to Reduce Your Mortgage Balance Faster!

There are mortgage loan management companies built around the concept of helping you make payments every two weeks, instead of monthly.  This method yields an extra payment each year, greatly reducing the amount of interest the borrower pays over the life of the loan.  It costs a little more because of the increased maintenance fees which are charged, yet still saves thousands of dollars.

Why tie yourself to that kind of a commitment when you have the option to do the same thing with a standard monthly mortgage--with no extra fee? 

It's rare to see a mortgage that penalizes you for applying extra money to the principal (see my information on "pre-payment penalties" to learn what can be an exception to this).  You can save a lot of money any time you add a little extra principal to your monthly payment; but if you could discipline yourself to increase every monthly payment by a twelfth, thus netting one extra payment a year...well, look at the example on this chart to see what I mean:   

Example: $100,000 loan, 30-year mortgage, 6.5% fixed interest rate

That one extra payment, spread out over the year, saves you over

$29,000 worth of interest!  If you pay more, it snowballs even faster.

One-time Payment

It may not be possible for you to increase your monthly mortgage payment.  But most mortgages will permit you to make additional payments to your principal at anytime. Maybe, five-years after moving into your home you receive a larger than expected tax return, or an inheritance or a non-taxable cash gift.  You could apply this money toward your loan's principal, resulting in significant savings and a shorter loan period.

Example:

With a $100,000, 30-year, 6.5% fixed interest rate mortgage loan, the borrower will pay a total of $227,542.98 to pay back the loan in 30 years. That equals $127,542.98 in interest payments.

If the same borrower makes a one-time $5,000 payment the first day of year 6, he/she will pay a total of $204,710.75 and pay off the loan in 27 years (324 months). That's a savings of $22,832.23 in interest.

Of course the variations are limitless, but you get the point.  When you own your own home, you can definitely take charge. It all depends on what works best for you, and I can help you figure that out.