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Shorten the Life of Your Loan

It’s true, you can take 7-10 years off of the life of your 30 yr. fixed loan by just making one extra payment a year.

How does that all work? Well, simple, when you first start paying off a loan, the interest is front-loaded into the life of the loan, so your monthly payment is almost all interest and no principle. In essence, you’re really not building any equity at all in your property. But, if you start making extra equity (or principle) payments on the property, then you’ll be paying off what you’ve actually borrowed (as opposed to interest) much faster. It’s almost the opposite of putting money into a savings account (as the account grows, you make more money from interest). Here’s an example:

You have a $350,000 30 yr. fixed loan at 7% that starts in August of 2008. If your monthly payment is $3000, take that $3000 and divide it by 12 months and you get $250/month. Send them a check for $3250 ($3000 + $250) every month and you’ll have paid off your mortgage in 22 years! You did that by making just one extra payment a year.

Here’s a nifty calculator that crunches the numbers for you so you can see how fast you can pay off the mortgage. Additional payments also help to build equity in the property and can help you get rid of PMI faster, get a home equity loan or a home equity line of credit. But remember, as the Notorious B.I.G. said “Mo’ Money, Mo’ Problems.”