Most mortgage terms are fairly clear. A 30-year mortgage will be paid off in 30 years and a 15-year mortgage will be paid off in 15 years. Some payment options, like an accelerated payment schedule or making additional payments, can shorten the length of your loan and reduce the amount of interest paid on the mortgage.
In finance-speak, a mortgage term is the length of time used to calculate the loan payments. Maturity is the date when the entire balance of the loan is due. For most mortgages, the loan term and the maturity date are the same. Although mortgages may have anywhere from a 5- to a 40-year term, lenders typically structure them over 15, 20 or 30 years. Second mortgages, or home equity loans, often have a shorter term between 5 and 15 years. If you take out a mortgage with a 30-year term and you adhere to the lender’s payment schedule, you will make the final payment on your mortgage in 30 years.
Unless you request otherwise, lenders normally structure a schedule of monthly payments on mortgage loans, although many of them offer other repayment schedules including bi-weekly payments. Through a process called amortization, the lender applies a portion of each payment you make toward paying down the original loan balance and the rest goes towards interest. After you make a payment, your loan is recalculated and interest accrues on the new loan balance. Bi-weekly mortgages require 26 payments per year -- the equivalent of 13 monthly payments. That additional payment each year not only reduces the amount of interest you pay on the loan, but it also reduces its length. A bi-weekly payment schedule for a $200,000 30-year mortgage at a 6.5 percent rate would shave six years off of the loan, according to BankRate.com.
Extra Principal Payments
Any additional payments that you make toward the original loan balance above and beyond your mortgage’s payment schedule can shorten the length of your loan. Doubling the amount of your monthly payments applied towards the principal can reduce the length of your loan by almost half. Even making one additional payment each year towards the original loan balance can have an impact. An additional payment of $1,000 per year on a $200,000 30-year fixed mortgage at a 5.0 percent interest rate, for instance, will reduce the length of your mortgage to roughly 25 years.
Before sealing the deal on your mortgage, ask the lender if there are any penalties for prepayment of the loan. A mortgage prepayment penalty clause could come into play if you make extra payments against the principal, refinance your loan or sell your home. Most lenders give you an option of taking out a prepayment penalty mortgage (PPM), according to Freddie Mac, and they may even offer incentives in the form of lower fees or interest rates on the loan. Be sure you are aware if your mortgage has this clause attached to it before making additional principal payments.
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