Reduce Interest and Pay Off Your Loan Faster
Do you want to pay less interest on your home loan? There are methods you can use to reduce your total interest and pay off your mortgage at a faster rate.
Bi-Weekly Payment Plans
Your lender might offer a bi-weekly mortgage payment plan, where every two weeks you make a payment that equals half of your normal monthly payment.
There are fifty-two weeks in a year, so you'll make twenty-six bi-weekly payments, or thirteen full payments each year--one more than you would make by sending the lender traditional monthly payments.
That extra payment reduces the principal balance of the loan, the balance that every future interest calculation is based on. As you drive down the principal, you drive down the total interest paid and the length of time it takes to pay the loan.
The Payment Process - Comparing Repayment Plans
Let's look at a mortgage with a principal balance of $150,000, a term of 360 months, and an interest rate of 6%.
* Monthly principal and interest payment = $899.33
* Total Interest During Life of Loan = $173,757
Bi-Weekly Option
Bi-Weekly Payment = $449.67
Total Interest During Life of Loan = $135,294
The loan is paid off in 24 years instead of 30.
Principal Comparisons
Most of us won't live in a single house for thirty years, so it might make more sense for you to look at shorter term savings than the long term payoff.
The first figure shows the loan's principal balance at the end of each year of monthly payments. The second figure shows how much principal remains at the end of each year of bi-weekly payments.
Year 1: $148,157 vs. $147,198 (Difference of $959)
Year 2: $146,202 vs. $144,224 (Difference of $1978)
Year 3: $144,126 vs. $141,066 (Difference of $3060)
Year 4: $141,922 vs. $137,715 (Difference of $4207)
Year 5: $139,581 vs. $134,157 (Difference of $5424)
Year 6: $137,097 vs. $130,380 (Difference of $6717)
Year 7: $134,459 vs. $126,371 (Savings of $8088 to date)
Alternative Way to Pay It Off Faster
A bi-weekly plan forces us to stay on track with additional mortgage payments, but it's not the solution for everyone who wants to reduce their loan principal more quickly.
* Your lender might charge a hefty fee to initiate a bi-weekly payment plan
* You might not be in a position to pay extra every month
* You might not be able pay the same amount every month
* It might be easier for you to make a lump sum payment once each year
One alternative is to divide your yearly payment by twelve and add that figure to each monthly payment, designating it as a payment
towards the principal balance. Your payment coupon may have a blank line for that purpose. If not, call customer service and ask how to make payments towards the principal.
For the loan in the previous scenario, you would divide $899 by twelve to find the extra amount to include with your payment, $75.
Your principal balance would equal the following amounts at the end of each year shown. The numbers in parentheses represent the balance due at the same time for someone on a bi-weekly plan.
* Year 1, $147,232 ($147,198)
* Year 2, $144,294 ($144,224)
* Year 3, $141,175 ($141,066)
* Year 4, $137,864 ($137,715)
* Year 5, $134,348 ($134,157)
* Year 6, $130,616 ($130,380)
* Year 7, $126,653 ($126,371)
No matter how you do it, making an extra payment, or more, each year significantly reduces the amount of interest you'll pay on your home loan.
Take some time play with the numbers. You might notice slight variations in the results from different sources, but the figures should be close enough to help you to evaluate your options. |
|
|
