Imagine paying off your mortgage 5 or 10 years earlier than the 30 year arrangement you originally set up. Many people are doing just that by paying a little more towards their principal each month.
As an example, consider the following loan terms and house value:
Value of home: $200,000
Term of loan: 30 years
Loan amount: $150,000
Interest rate: 6%
Monthly payment: $899.00*
*This amount is principal and interest only, and does not include insurance, taxes, association dues, fees, or assessments.
If you were able to pay an additional $100 per month towards the principal of your mortgage, you would reduce the number of months from 360 months (30 years) to 279 months (about 24 years). This is a 6 year savings!
Additionally, consider that you will be paying 30 years of interest on this loan totaling $176,757. At the end of the loan, you end up paying $326,757 for the $150,000 loan you agreed to pay. By making the extra $100 payment per month, your total interest is reduced to $128,470. A savings of $48,287 for the same exact house! In order to find the extra $100 per month in your budget can be difficult sometimes. It may mean cutting back on eating out, doing your own housework, taking on a part-time job, or finding other unique cost-cutting measures.
If you bought your home with less than a 20% down payment, your bank is most likely charging you private mortgage insurance (PMI). The instant that you own 20% of your home, be sure you contact your bank to have them remove the fee for this hefty insurance. Mortgage companies require that you pay PMI if you don't have 20% or more as a down payment -- this is to protect the lender in case you default on the loan.
What if you don't have an extra $100 per month to apply to the principle? Many banks now offer a service where they will automatically remove half of your mortgage payment from your checking account every other week. In our above example, it would mean paying $449.66 every other week instead of the $899 monthly mortgage payment. Because some months are longer than others, you end up paying an additional mortgage payment over the course of the year. For example, when you enter in the every other week schedule of paying roughly $449.66 into the Mortgage Saver calculator found at www.MortgageSaver.com, it will show a savings of $36,211.03 over the course of the loan as well as 6 years and 3 months. Check to see if your bank will arrange this service for you free before paying a third party company such as Equity Accelerator or Mortgage Saver. The third party companies will charge a start up fee along with transaction fees every other week. If your bank cannot arrange for every other week payments, a third party company is still a viable option.
You may choose to send an additional $100 extra each month ($50 per payment) towards your loan to accelerate the process even more. If you manually send in an extra payment via a check, be sure to indicate that the extra money should be applied to the principle on your loan. If you are shopping for a new home, consider a 15 year or even a 20 year loan instead of a 30 year loan. Although the monthly payments average about 30% more per month depending on your interest rate, you own your home in half the time!
The prepayments on your mortgage provide a great return on investment! Whatever extra payments you pay can shorten the life of your mortgage. You will be pleased with the savings you see with the prepayment strategy and the speed in which you build equity in your home.
The author, Kimberly A. Griffiths, has been through the vicious cycle of debt herself, and provides a no-nonsense system to managing your money paycheck to paycheck. Visit the One Paycheck at a Time Web site for articles and tools to budget your household: http://www.OnePaycheckataTime.com
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