If paying off your mortgage early is your aim, always ask if your lender allows prepayments, without penalty. You don’t want to pay toward the principal and get penalized for it. Also be sure your extra money is being put toward the principal, rather next month’s mortgage payment. That won’t reduce your interest payments.
Starting to pay off principal at any point during the term of the mortgage loan will help save you money, but start early on to make the most difference – the first half of the payments go toward interest. After the halfway point, the majority of your monthly payment goes to the principal.
Strategies For Paying Down The Principal:
1. Add Principal Payments Monthly.
Just tacking on an extra $25, $50 or $100 each month can shave years off your mortgage.
Example: For simplicity’s sake, say you’ve just purchased a home for $250,000, and put 20%, or $50,000, down. That leaves you with $200,000 to finance, which you do through a 30-year conventional mortgage at 6% interest. Plug those numbers into Bankrate.com’s mortgage calculator, and the monthly payment is $1,200. The mortgage would be paid in 360 monthly installments over the course of 30 years.
You don’t have to add a ton of money to your monthly payment to make a difference. Making an extra principal payment of $50 monthly, from the very beginning of your loan period, shaves three years off the length of your mortgage. Instead of paying $231,676 in interest (that’s more than the original loan of $200,000!), it will be $203,797 – a savings of $27,879 over the life of the loan. Similar savings can be realized if you start prepayments at any point of the loan.
2. Make Yearly Principal Payments.
Pay a larger chunk of money toward the mortgage once a year. This is even easier if you plan it around your tax refund or annual work bonus, if you get either.
Example: A payment of $1,000 made once a year reduces the term of that same 30-year mortgage by 56 months – almost five years – and saves you a whopping $42,760 in interest.
3. Make Lump-Sum Payments When You Can.
Even if you don’t follow a set schedule of making prepayments, throw money at the loan when convenient. If you inherit money or get a tax refund, think about putting it toward your mortgage. Every little bit helps!
Find the mortgage prepayment plan that works best for you, and you can pay off your mortgage sooner rather than later, leaving you sitting pretty and freeing up funds for other things, such as travel, kids’ college tuition, savings, and retirement savings.
Are you ready to sell your home and need help finding the path to your new one? Call 877.672.4543 to speak with a mortgage loan officer, fill out our online mortgage application or visit a Mercer Savings Bank location near you today.
Information contained in this article from, www.christianpf.com.