You can accelerate your mortgage pay-off by years and save thousands of dollars in interest by making extra payments on the principal portion of your mortgage. Principal is the initial amount of money you borrowed, less whatever amount you have already paid back. Interest is the "rent" you pay for the use of the remaining principal. The more you pay down your principal balance, the less interest you will pay, so a greater amount of your monthly payment will go against the principal. You can accelerate a loan with a large lump sum payment or discipline yourself to make a monthly payment over and above your regular payment.
Lump Sum Payment
Contact your lender to learn his required method for noting extra payments. Some companies want the extra payment in a separate check, rather than lumped in with your regular payment. Others will have a space on your monthly payment coupon that allows you to give instructions for disposition of a payment.
Review you mortgage statement to establish your interest rate -- usually called "annual percentage rate," or APR, and the amount of money you still owe on principal. Let's say that you closed in November 2010 on a 30-year loan for $350,000 at an interest rate of 5 percent and a monthly payment of $1,878.88.
Enter your loan information in an online mortgage calculator (see Resources) and press "calculate" to get the current pay-off date. In the aforementioned hypothetical loan, your payoff will be in November 2040.
Enter the amount of your one-time payment in the box below the original number and press "calculate" again. Let's say your great aunt left you a bequest for $10,000 and you're going to apply all of that to your loan principal. In the hypothetical $350,000 loan, your $10,000 payment changes the pay-off date to January 2039, shaving 22 months from the life of the loan.
Multiply the number of months you saved by the monthly payment to calculate the total savings your one-time payment achieved: $1,878.88 times 22 equals interest savings of $41,335 over the life of the loan -- a return of more than four times what you paid.
Make your lump sum payment to the lender, following her instructions to ensure the payment is properly credited against your principal.
Inspect the payment record closely on your next statement to ensure that it was credited correctly -- and enjoy having "cheated" the lender out of all that interest.
Contact your lender to learn his required method for noting extra payments.
Review you mortgage statement to establish your interest rate -- usually called "annual percentage rate," or APR, and the amount of money you still owe on principal.
Enter a modest amount that you think you can afford each month in the appropriate box below the original calculation and press "calculate" again. Let's take the $350,000 hypothetical loan and add $100 a month to the regular payment to get a new pay-off date of February 2036 -- a reduction of 57 months on the life of the loan and an interest savings of $107,096.
Experiment with the calculator to determine how different amounts of principal payments will help you reach your goals. A larger monthly payment in the early part of the loan may give you the biggest bang for your buck.
Add the extra principal payment to each month's regular payment, or send a separate check, making sure that you follow the lender's instructions to get it properly credited.
Review your statement closely every month to ensure that your prior payment was credited as you requested.
Items you will need
- Mortgage statement
- Be very careful to make sure your extra payment goes toward principal and not toward some other charge, such as the tax and insurance escrow.
- Whether or not you can continue to make extra payments every month over the life of the loan, it is still worthwhile to do it whenever you can. Since it is entirely voluntary, you incur no penalty for skipping a month -- and even small amounts of money against the principal will have an accelerating effect.
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