accelerated mortgage paymentsAccelerated Mortgage Payments

Accelerating your mortgage payments can mean paying off a 30 year mortgage in 23 years.

by Tom Levine

July 27, 2004

Wanna know a little secret? There is an ingenious method you can use, to pay off your 30 year fixed rate loan, in 23 years or less. It’s straightforward, simple, and easy to understand. In this article, we’re going to explore this little known secret, and we’ll provide several examples of how it works, a few methods on how to implement, along with some information on where to go and how to get started.

Accelerated Payments

By accelerating the payment structure on your loan, the life of the loan is reduced:

  • In a normal 30 year fixed rate loan situation, your monthly payment is applied towards principle and interest. It is amortized over the course of 30 years.

  • So any money above and beyond your normal payment is applied solely towards the principle of the loan.

  • By reducing the principle of the loan, you are reducing the total amount of interest that must be paid, and that equates to an early loan payoff.

An Illustration

  • You bake a cake (principle), and put it in the oven. Once the cake is out of the oven, you’ll need to frost it with icing (interest). Let’s say your cake is 12 inches in diameter, and let’s say you need 3 jars of icing.

  • But you’re hungry, so you eat half the cake early. Now, the cake is only 6 inches in diameter. Because of this, you only need 1 jar of icing.

  • By reducing the cake (principle), you’ve reduced how much icing (interest) you need.

  • Furthermore, it takes less time to frost 1 jar of icing.

  • So, by paying a little more in principle, you reduce the interest owed. That reduces the life of the loan.

Methods

Think of it this way: All you have to do is make 1 extra monthly house payment a year. Do that and you reduce the life of your fixed rate loan by about 7 years! You can be as creative as you want to accomplish this, but here are 3 known methods:

  • Biweekly Payments: Normally, you make your house payment once a month, or 12 times a year. But with a Bi-Weekly payment structure, you take your normal house payment, and divide it by two. This is the amount paid every two weeks, instead of once a month. By doing this, you basically make 1 extra (monthly) payment a year.

  • Double Payments: Double Payments simply means an extra house payment. Once a year, you write out a check for twice the amount. So, if your house payment is normally $1,000 a month, then on December 1st, for example, you’d write out a check for $2,000. This, in essence, accomplishes the same thing that Bi-Weekly Payments accomplish. You make 1 extra payment a year.

  • 1/12 increase in payment: Increase your monthly mortgage payment by 1/12, and you accomplish the same thing. Let’s say your house payment is normally $1000. 1/12 of your house payment is $83. So, you start making payments for $1,083. Guess what? Your loan is paid off in about 23 years instead of 30.

Sidenote: A “Bi-Monthly” payment is not necessarily the same thing as a Bi-Weekly payment. It may just mean that you are paying ½ your monthly payment on the 15th and ½ is paid on the 30th. The key is this: Are you paying a little more each year, such as 1 extra house payment? If you are, then early payoff is your ripe reward!

Here’s an Example

Bob has a $300,000 loan at 7% interest, and his monthly mortgage payment is currently $1995.91. Each year, Bob pays $23,950.92.

  • Bob calls his lender, and his payment schedule is restructured as a bi-weekly payment. Every two weeks, Bob writes a check out for $997.96. Because of the two extra payments this year, Bob will have paid $25,946.83. His loan is reduced by about 7 years.

  • Or, on December 1st, Bob writes out a check for $3,991.82. Because of this 1 extra payment, Bob will have paid $25,946.83. His loan is reduced by about 7 years.

  • Or, Bob pulls out his calculator, and adds 1/12 to his monthly payments, which equates to $166.33. Bob now writes out a check each month for $2,162.24. At the end of the year, Bob will have paid $25,946.83, and his loan is reduced by about 7 years.

The Next Step

  • How disciplined are you? Because, if you’re not disciplined at all (like myself), then what are the chances of you sticking with the program? Call your lender, and set up the bi-weekly payment. This way, you are totally hands off and it will all become automatic and habitual. You can always change it back if times get rough, but at least there’s no temptation to revert back to cheaper payment.

  • Or, do you have online bill-pay with automatic payments? If so, go into your bank online, and add 1/12 to your monthly payment.

  • Can you afford to accelerate your payments even further? Adding 2 extra monthly payments a year, for example, reduces your loan by about 10 years. Of course, now it might be time to consider examining a new secret strategy, the 15 year fixed-rate loan!

I’ve enjoyed providing this information to you, and wish you the best of luck in your pursuits. Remember to always seek out good advice from those you trust, and never turn your back on your own common sense.

- Tom Levine

Tom Levine provides a solid, common sense approach to solving problems and answering questions relating to consumer loan products. His website seeks to provide free online resources for the consumer, including rate-watch, tips and articles, financial communication, news, and links to products and services. You can check out Tom's website here: http://loanresources.net , or you can email Tom at info@loanresources.net .

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