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Lawrence Yerkes - Realtor, e-PRO - RE/MAX Suburban - We Get Results! - Welcome!

Pay Off Mortgage Early and Save Thousands of Dollars
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Here's How To Pay Off Your Mortgage Loan In One Half Time or Less And Save Thousands of Dollars

The process is extremely easy, and yet a revelation to most home buyers, particularly when they realize that they can save more interest than 75% of the total loan amount.

Simply, it is merely adding the next month's principal payment to this month's regular payment, which in effect does two things to your mortgage loan:

#1 - Reduces the term by one month each time you add an extra principal payment, and

#2 - Ultimately saves an amount equal to the interest that you would have had to pay with the next regular payment, which in the early years of the mortgage may be eight times greater than the principal amount each month.

It must be noted however, that this process does not eliminate the necessity of making the next month's regular payment, but merely moves your next payment down the amortization schedule, one more line closer to the final payment.

In order to accurately follow the progress of your mortgage loan, you will need an amortization schedule. This is a form indicating the monthly payment breakdown of the interest and principal of each payment and the remaining mortgage balance.

As an example, an amortization schedule for a $80,000 mortgage loan at 12% interest for 30 years, with an interest and principal payment of $822.90 would look like this:

PMI Table

You will note that with each payment the principal increases slowly, while the interest proportionately decreases. Towards the final payments, the procedure gradually reverses and the principal exceeds the interest payments.

By using the sample chart above, a typical application would be to pay the regular payment on line #1 amounting to $822.90 (plus the required taxes and insurance, if you are required to pay them into an escrow account), and then also add the principal payment on line #2 which will also be applied to your principal balance. In effect by doing this, you have actually saved the interest payment on line #2 in the amount of $799.77. The next payment that you will make will be the one on line #3, NOT#2.

If you choose to pay several additional principal payments instead of only one, the savings compound dramatically. As an example, with three additional principal payments being made, you would pay regular payment on line #) amounting to $822.90 (plus the required taxes & insurance) than adding principal of line #2, line #3, & line #4. In this case, your next payment will be on line #5 not #2. (Again I stress that these additional principal payments do not permit you to miss any regular monthly payment). However, you would have saved $2398.62 in interest from lines 2 through 4 and have shortened your mortgage by 1/4 year.

If there is more than one income in the family, this program can be accomplished with little financial strain. Many couples apply the entire secondary income to the loan each month and clear their house in just a few years.

Keeping an accurate record of your progress is a must, plus the tact that it gives one a great feeling of accomplishment as they see their monthly savings. Each regular and additional payment should be registered every month, and of equal importance is the necessity to advise the mortgage lender of exactly what you are doing each month.

The best way to accomplish this advice to the lender is to attach a letter with each payment, outlining the breakdown of the payment as follows:


Regular payment #1 $822.90
Tax & insurance escrow  $180.00
Total regular payment  $1002.90
PLUS principal of #2 payment    $23.11
Total payment enclosed $1026:03

Note: The next regular monthly payment due on my amortization schedule will be #3.

If you chose to send in more than one principal payment, your breakdown would change accordingly.

Some banks and mortgage service companies request that these additional principal payments be an accumulated group of principal payments where the sum total exceeds $50.00 or $100.00 to minimize bookkeeping. They may also request a 30-day notice of any intention to pre-pay principal. This can simply be done by advising them in writing each month of your next month's intention at the same time that you mail your regular payment.

A few savings and loan associations still use an older, (and even more desirable) process of permitting any sum, no matter how small or large, to be paid upon principal at will. Usually with this system, the principal balance is printed monthly in a payment book which will keep you advised of your exact progress.

Strangely enough, many banks and mortgage company employees still are not familiar with this program, and they may advise you that such a plan cannot be implemented with your mortgage loan. IF YOU HAVE A PREPAYABLE MORTGAGE, the mortgage lender should accept additional principal payments. All F.H.A. and V.A. mortgage loans and most conventional amortizing type mortgage loans are prepayable. There are some very rare exceptions with the conventional type where extra principle payments are not permitted, and such restrictions will be written in the mortgage document. Check your copy if in doubt, or ask your lender to supply you with a copy of any such restriction. Don't just take the word of an employee without proof.

Using this method as a regular monthly habit, your mortgage loan will be paid off in 15 years instead of 30 meaning a savings to you of $108,122.00 on a $80,000 @ 12% mortgage (savings of over $73,710.37 at 8%). You may be shocked to know that the interest for a full term 30 year mortgage loan of $80,000.00 at 12% is $216,244.00  (interest paid is $131,324.23 at 8%).

Note: My purpose with this article was not to address all financial investment options in one article, but to focus specifically on a simple method to save on the total money expended on your mortgage to pay interest and increase your ability to build equity that is a fairly easy, relatively risk-free for the appropriate people.  It allows you to start small and work your way up over time.  It assumes that remortgaging is not a better option for you.


Copyright by Lawrence Yerkes.  All Rights Reserved.


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