A $100,000 loan at 8% for 30 years results in a monthly payment of about $729. At the end of the 30 years, the total payment to the bank will be $262,440 resulting in paying the bank $162,440 for the use of $100,000. There are several techniques that allow you to pay less interest to the bank, freeing up a large amount of money for future needs such as retirement or children's education.
One technique is to pay an extra amount each month equal to the next month's principal. First, obtain an amortization schedule from your mortgage lender, a sample follows: (All illustrations for this section are based on a $100,000 loan for 30 years at 8% interest.)
payment principal interest balance ======= ====== ====== ========= 0 $ 0 $ 0 $100,000.00 1 $62.24 $666.67 $ 99,937.76 2 $62.66 $666.25 $ 99,875.10 3 $63.08 $665.83 $ 99,812.02 4 $63.50 $665.41 $ 99,748.52 5 $63.92 $664.99 $ 99,684.60 6 $64.35 $664.56 $ 99,620.25 7 $64.77 $664.14 $ 99,555.48 8 $65.21 $663.70 $ 99,490.27Instead of paying $729 (interest + principal) for payment 1 for the above loan, include the principal for payment 2, thus a payment of $729 + $62.66 = $791.66. You would then be at payment 3 which would then be a payment of $729 + $63.50 = $792.50. The assumption is that your income will increase over time, allowing you to increase your payments with little impact on your financial situation. After continuing the same payments for 10 years, resulting in an average increase of about $2.00 per month, you will reach a mortgage payment of $1036. You will now have $36,662 equity in your home instead of $12,400 if you continued to pay $729 per month; a great position for purchasing a new and larger home! Continuing the payment of $1034 for another 10 years will result in the completion of the 30-year mortgage in 20 years. The final result will be total payments of $230,000 to the bank, saving $32,000 in interest payments.
Another technique is to pay a percentage more than your normal mortgage payment. The following example illustrates a percentage of a payment increase, number of years the loan will be paid, total payments made, and the interest saved by paying extra each month:
% inc. payment paid in total interest (years) payments savings ==== ======= ===== ======= ====== 0% $729 30.0 $262,440 $ 0 5% $766 25.0 $229,800 $32,640 10% $802 22.0 $211,728 $50,712 15% $839 19.75 $198,843 $63,597 20% $875 17.75 $186,375 $76,065 25% $911 16.5 $180,378 $82,062 30% $948 15.0 $170,640 $91,800The 30% increase in the monthly payment is similar to a 15-year mortgage. If you can make the same monthly payment commitment as a 15-year mortgage, then get the 15-year mortgage instead of a 30-year mortgage. You will then discover that the interest rate is lower for a 15-year mortgage resulting in an even lower monthly payment while at the same time saving thousands of dollars in interest payments to the bank over the life of the loan.
Another idea for those not able to include an extra amount with the normal mortgage payment is to make an extra payment towards the principal anytime during the month. Some companies calculate interest daily or on a monthly basis. If the company calculates the interest monthly, then the extra payment will result in the recalculation of the amortization schedule to occur at the normal monthly payment date instead of when the extra principal payment was applied. You will still pay more towards the principal, but you won't realize additional interest savings by paying early. The same also applies to making a mortgage payment early. If the company calculates the interest daily, then the amortization schedule will be recalculated when the additional principal is paid. The greatest benefit is for the interest to be calculated daily. Check with your mortgage company to determine which calculations they perform.
A bank will typically not tell you the above information because they want to earn as much money from you as they legally can. The tax benefits will decrease faster, but more money will be free to be used for anything else along with the added bonus of now being debt free.
Inquire about paying your mortgage using automatic withdrawal. The rates may be lower and may reduce your service charges. In addition, you won't forget to send in your payment.
BEWARE: Ask your bank if they will allow extra payments every month and if there is a penalty for paying off a loan before the term of the loan contract. If there is a penalty, consider paying the fee because you will still be ahead due to the interest savings.
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