Shrink Your Mortgage Faster

How a Single Additional Payment Reduces your Mortgage Term When you make a monthly payment on a 30 year mortgage, it is divided between paying interest and principal. The conventional 30 year mortgage starts out with your monthly payment going almost entirely to the interest, and only a small amount being applied to the principal amount of the loan. Gradually, your payment will be divided more equally, and eventually, when the loan has almost been paid off completely, the payments will go mostly towards principal with only a small amount paying interest. You can shrink the number of years you have to pay your mortgage payment simply by sending additional payments to your mortgage company. A single additional payment in a year can take 10 years off your mortgage term, meaning instead of paying your mortgage for 30 years, you’ll only pay it for 20 years! You can use a free online mortgage payment calculator to see the effect of sending an additional mortgage payment each year on a specific date, or what will happen to the number of years you have to pay your payment if you were just to send an extra $50 or so with your payment every month.

Lump Payments

Many mortgage lenders that do not penalize for making prepayments on your mortgage loan will allow you to make a lump payment against the principal of your mortgage at least once each year. The amount of money you are allowed to pay in one lump sum will depend on the mortgage lending institution, but a common amount is 20% of the original loan balance. So if you borrowed $100,000 originally for your mortgage, each year you may be able to send a single, lump sum of $10,000 which will come off the remaining principal balance of the loan. This is going to accelerate repayment of your mortgage the most out of any prepayment option available, because the entire amount is applied directly to the principal mortgaged amount, and because the amount of interest charged monthly is dependant upon the remaining balance of the mortgage.

Prepayment Penalties

Some mortgage lenders impose penalties for making prepayments or additional payments on your mortgage. If your lender is going to charge you for making additional payments, you’ll find it as a provision in your contract. The penalty is typically a percentage of the remaining principal balance at the time you make the prepayment. One way to determine whether or not it is worth paying the penalty in order to send additional money with your mortgage payment each month, or one additional payment per year, is to figure out the amount that the penalty will be. If you are unable to calculate the amount of the penalty yourself, call your mortgage lender and ask for a specific dollar amount. Once you have this amount, you can subtract the penalty from the amount of your planned additional payment, and run that number through a mortgage payment calculator to determine the results of making that payment after paying the penalty for doing so. For example, if you have a 30 year mortgage in the amount of $200,000, and you pay 7% interest, your monthly payment would be about $1330. Let’s say you want to make a single, additional payment of $1330 once each year. We’ll say that the prepayment penalty is $330 for the sake of this example. When you go to use the online mortgage calculator to determine the number of years you’ll save on your mortgage term by making this additional payment per year, you’re only going to enter $1000 as your additional payment, since you have to pay $330 for the penalty. Each mortgage lending institution charges prepayment penalties a little differently, so if you want to make additional payments on a loan with prepayment penalties, it’s always best to check with the lender for the exact amount and details as to how it will effect your additional payments before making them. You may be better off to save your “additional payment” amount for a few years, and make a single, lump sum prepayment.