How to Pay Mortgage off Early by Paying More Principal
85Paying off your Mortgage Early
Some people get a 30 year mortgage with the intentions of paying if off earlier but the time just never rolls around for that extra payment or principal curtailment because of added housing expense for something else. It is not that hard a thing to do if one makes the decision, follows through and more than likely you will never miss the extra money. Let's just say; don't eat out on Friday night and multiply it by four and you've got an extra amount to put on the principal balance of your mortgage loan. Sounds hard? It really isn't just takes a little effort to deny yourself a little something at the present and give yourself an exciting moment when you realize that you have 25 year not 30, remaining on your mortgage. Of course the more you pay the shorter your maturity will become.
Not only does this help pay your loan off early, it can help you get rid of the mortgage insurance premium (MI) quicker, if your loan to value was greater than 80 percent to begin with. It also will grant you more equity in your home and more profit in your pocket should you need to sell or move. It also stands true for 15, 20, and 25 year amortization periods.
As we know not everyone intends to stay in their current home for 30 years or even 15 years. At any rate; the more equity you have in your home, the better off you are and in our current housing market; this will shield you should the value of your home decline like so many in the past two to three years.
Bi-Weekly being Retired Update 3/3/10
I just received notice that FNMA-Fannie Mae has retire their bi-weekly mortgage product. At the time of this publication, I did not know of this change. I do not know if Lenders will give this option for their portfolio loan or not. You can find this out by contacting your Lender but if it is a FNMA loan, I am sure it will not be an option.
You can still pay an extra payment and this will give you the same results and if you pay more than an extra payment to the principal you are thereby still reducing your principal balance even further and therefore lowering the life of the loan and the amount of your interest payment as you are paying interest on the remaining principal balance.
Pay It Off Early
Way's to make it Happen!
Bi-Weekly Mortgage Payment:
A bi-weekly mortgage allows you the ability to pay your payment every two weeks. Some banks do not offer a bi-weekly mortgage up front, but will invite you at some point to enjoy the benefit of paying your payment bi-weekly. *not all banks do this, but you can check with your servicer. This is an advantage for you to payoff your loan approximately 6 years early.
Instead of making 12 payment yearly, you are making 26 payments which actually is making 13 payments instead of 12. It is argued that you can reap the same benefits by making an extra principal and interest payment during the year. You CANNOT skip a payment if you have made an extra payment and it went to the principal of your loan. The payments are due once monthly; you can pay your payment ahead of time and get ahead, but you never skip a payment from your statement or your coupon book. This would indeed get you into credit issues.
Example: $250,000 mortgage principal - 30 years amortization - 6.5% interest rate
Monthly payment: $1,580.17 Bi-Weekly paymkent $790.09
Pay-off date: 12/01/2039 Pay-off date: 01/01/2034
Time saved: 5 years 11 months
Interest paid: $318,816.22 Interest paid: $245,383.31 =
Total Interest Savings of 73,477.91
Normally bi-weekly payments are deducted from your checking or savings account every two weeks and is a requirement to obtain the benefit of making bi-weekly payments. There may be some fees and you might have to pay an additional payment upfront. Servicers have different guidelines and requirements. Check with your lender to see if they offer this option.
The benefit to you initially will depend upon the upfront charges; if any and your current financial situation. This is neither recommended nor discouraged; it is only an option that one may choose.
A Principal Curtailment
Not eveyone has the ability to afford a lump sum principal curtailment to their mortgage. But some do, so therefore I will explain this as well.
A principal curtailment can actually be any amount over and above your principal and interest payment or it can be a larger principal payment. You can, as mentioned above pay your payment a month or two ahead of the regularly scheduled payment, but in doing so, you never skip a payment. You can make a habit of payment an extra $100 toward the principal balance or for instance if you have saved some extra money and want to reduce the principal of your loan you by $5000, you may do so at any times. Unless of course you have a pre-payment penalty clause which restricts this. In general, Agency loans (Fannie Mae/Freddie Mac) do not carry a pre-payment penalty). You should check your note and mortgage for pre-payment clauses.
Paying extra curtailments on your loan does not change your regularly scheduled payment or payment amount. This can only be done by a modification or refinance of the principal balance over the remaining term.
Whatever you decide to do concerning the above; always make sure that you specify the extra money should go to the principal balance of your loan and not get place in escrow or something else by mistake.
Any of the above will reduce the principal balance of your loan,the term and the amount of interest payments you will pay over the life of the loan. It will depend upon the amount you pay. One extra $100 dollars will not have an effect until the end of your loan and your last payment would be less. It is something you will have to frequently to make a big difference. If you pay consistently each month it will not be hard to get an amortization schedule to see where you stand. I will give you some additional information below.
Information
Please note that you must check with your specific lender/servicer for their requirements and regulations. It can depend upon if your loan has been sold to the Agencies and if they will allow the bi-weekly mortgage. You must check to see if you have a pre-payment penalty and the term of it, if you do and that it will not affect your commitment.
These are suggestions, which can give you the end results of paying off your loan early and from my experience of being in mortgage lending for 30+ years. These are great choices, if they meet your needs. Regulations and guidelines change frequently so this must be taken into consideration when following this lead.
Hubs with Mortgage Information
- Mortgage Equity Loan
This type of mortgage loan, Home Equity Line of Credit is also called HELOC and you may see it interchangeably. From part of 2002-2004 I was in originations at a Bank mortgage department and we had promotions... - Mortgage Overview
When I start this Hub about Mortgage Overview, I begin to feel sorry for all of the good people who have either lost their home or, are about to. I can say that some of this could have been avoided if...
Useful Tools and Information
- Mortgage Update-FHA Changes - InfoBarrel
Mortgage Update-FHA Changes From Washington: The Federal Housing Administration (FHA) Commissioner David Stevens has announced a set of policy changes to strengthen the FHAs capital reserves, while enabling the agency to continue to fulfill its miss - Loan Calculator
Bankrate.com provides a FREE loan calculator and other loans calculators. - Mortgage Loan Facts: Mortgage Loan Modification
There are times you can seek a modification from your lender if they have the loan in their portfolio and have not sold the servicing of the loan to the agency. - Amortization Schedule Calculator
Use the Loan Amortization Schedule Calculator to estimate your monthly loan repayments
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Thank you festersporling1 for stopping by to read this. It is true and really a matter of just a little bit of discipline. If someone is going to stay a long time in one house it is especially good to think about.
Thanks for your comments
More good stuff (very good stuff) for readers!
Thank you again I appreciate it. Come back soon.
lctodd
While the fully amortized thirty year loan is the best of the worst, it is still a money maker for the bank.
I did a hub on it being a scam.
But that is my opinion.
Opinionduck, Yes, it is a money maker for the bank and if one pays off the mortgage early, they are saving themselves some money. We all know that everybody can't get a 15 or 20 year loan so they have to go for the 30 year but when we get old we realize we should have watched our pennies and got the big mortgage debt paid. Thanks for coming by and commenting.
lctodd
Thanks for commenting on my hub, the loan scam.
The real point of that hub was not the difference between the 30 year loan versus a shorter loan but paying the 30 year interest schedule but paying it off early, not by paying additional principal monthly, but say when you sell your house.
Remember the whole purpose of the loan calculation is because the financial institution has to wait the term of the loan to get all of its money back. But, when you pay the loan off early, especially really early, do they deserve the rate that was based on the full term. I say no, and that is the scam and ripoff. The lender after getting an early payoff, can then take that full amount and reloan it again. Each time say in the original 30 years that they get full payoff, that increases the profit on the same money.
Thanks, your finance hubs are good reading for most people that are not familiar with mortgages, and even ones that are familiar but could learn more about them.
BTW, I prefer the additional principal method over the bi weekly, just in case something happens and you don't have the money. Biweekly is fixed, whereas the additional principal is optional.
Thanks
OpinionDuck, I am not offended that you have opinions. The information I give is from my 30+ years in mortgage lending and when I write something, I write it for those who do not know much about mortgage loans and the average person does not understand all there is to know about mortgage. I don't know all there is to know myself but I have seen a lot of things having underwritten loans, originated, processed and managed in the industry. Some borrowers believe everything the Loan Officer tells them because they do not know what not to believe and some originators are not as knowledgeable as they should be. But I try to make it simple and easy to follow for those who do not know.
This is my opinion on what you are saying about the early pay off. You pay interest on the principal balance for each payment. If you pay the loan off in ten years, you are only paying the interest on those ten years on the principal balance that remains after each payment. The interest goes down each month the payment is made and the principal payment increases each month..(more to the principal and less interest) as you know, I am sure, so I don't full understand what you means about the Banks ripping them off on a early pay off. The Bank is only getting the interest on the remaining principal balance of the loan each month during the payment process. When paid, they only get the principal balance remaining..no interest. I will say that the Banks made a lot of money from the Subprime borrowers especially when charging 5-6% closing cost on loans. There was too much money added in the sale prices to begin with and then the seller added in the closing cost he decided he would pay and that is how the housing values became inflated and now we are seeing declining values everywhere.
Thanks for stopping back by to comment. I appreciate it and I learn something everyday.
Great info! I'm checking into the bi-monthly thing!
Thank you Habee. Did you notice that as of March Fannie Mae has retired this program. I do not know if the Servicers of loans are still doing these are not but they may be....who knows..it is changing everyday.
Thanks for coming by to read and comment.
This is a very informative Hub. Thanks.
Suziecat7 thank you for stopping by to read and comment. I appreciate it so much.
All extremely sound advice. When you look at the actual cost of paying off a mortgage over the life of the loan, shaving off cost and YEARS is absolutely beneficial. If you carry a 30 year loan for the life of it, you'll have paid 3 times the price you paid for the house, and even if you sell it at "profit," the money you will have actually paid in will not add up. Any time I can make an extra payment on any of my properties I do it.
Thank you Springboard for stopping by to read and comment. You are so right and when one get older; who needs a large house payment when only receiving retirement...and if SS goes away (of course we don't know it will) there are going to be a lot of people hurting in years to come in some areas of the USA. Thank you again.
Awesome. This hub page is very informative, I'm going to share it to my friends. Keep it up!
Homebuyerhelp; thank you so much for your nice comment. I appreciate you stopping by and I hope you will join me again. Thanks again!
Great info - I'm opting to pay an extra $500 a month on my mortgage and then putting in about $10,000 to $20,000 at the end of the year from my savings and part-time income. If I keep at it, I will be paid off in under 5 years. I would have paid $150k+ in interest charges but by paying it off way early, I am actually paying just $12,000 and some change! Awesome!
Junkyudog...you go guy! That is the way to do it and it takes a lot of discipline that so many do not have. Yet when they get older, they will then wish they had....at least for the average American... Thank you for stopping by to read and comment...it is much appreciated.
Great article! Please consider adding this mortgage calculator: http://www.mortgage-amortization.info/ to the 'Useful Tools' section, since it allows various prepayment options just like the one Junkyudog needed to calculate the amortization.
Thank you amortization for stopping by to read, add and comment. I appreciate it and the mortgage calculator is certainly a useful tool. Thank you again.
Great hub :)
Portugal Mortgage Finder...I appreciate you stopping to read and comment. Thanks for the positive comment.
Great info!
Bi-weekly payments huh? I should really consider doing this. I have a friend who is doing this and he said that this is one of the things he is doing to be able to retire by the age of 50.
Chicago payday loans, thank you so much for stopping by to read and comment. I am not sure that lender's are offering the bi-weekly payments at this time after all of the mortgage meltdown but all it takes of course is a phone call to your lender to see. I know that in the past there have been lenders that did offer this ability to make your payments. If you loan is in a Fannie Mae pool, you probably cannot but it is worth checking into. I know that Fannie does not offer the product type any longer. I do not know exactly why. If you can't do the bi-weekly payment, you could still pay an additional 1/2 payment to principal each month with your regular payment and it would do the same or better. You would still need to pay your payments as schedules but the extra 1/2 to principal would definitely get you to the pay off stage effectively and much sooner.
Thanks again for stopping by.
Bi-weekly payment seems promising.
Please make sure you see the above update. Fannie Mae no longer offers the bi-weekly payment. That does not mean that your mortgage company does not though. You will just have to check it out to see if they will allow you to make the bi-weekly payment.
Thanks for stopping by.
This is great advice. Biweekly payments can save people so much money in interest.
Mortgage-news thanks for stopping by to read and comment. I don't know why they stopped the bi-weekly. It is very good for paying off a mortgage earlier.
Thank you again.
Great advice - I did not know a "pre-payment penalty clause" existed.
MarloByDesign, The pre-payment penalty is for most loans which are not Fannie or Freddie Conventional first mortgages...usually in the SubPrime market. Those loans which are less than perfect loans and higher interest rate etc. They give the pre-payment penalty to keep those loans on their books longer so that they can make the higher interest rate as they were (Risky) loans to begin with.
I appreciate the stop. Thanks for your comments.
lctodd1947 thank you. I have the same mindset as Junkyudog. Do you think it is worth refinancing to lower one's rates by 2% or add extra money to the principal to pay off the mortgage sooner? The reason I am asking is that refinancing closing costs are $3,000! I would rather put $3,000 on the principal! Thank you for your help.
You have the right mindset. In the long run, if you add more money each month to your payment to the reduction of the principal; it will more than likely have a better effect than paying the 3K out of pocket and expecially adding it back to the loan. For instance if you have a 20 year loan/30 etc., and you can afford it; pay a 15 year payment. Go to a mortgage calculator; input your principle balance and see what a 15 yr payment would be. For instance if you have if you have 225 months left; input 180 months. It will give you what you need to pay if off in 15 years. http://mortgageloanfacts-u-need.blogspot.com has a calculator.
Thanks so much for stopping by.
Bi-weekly payments! Never thought about it as a valid option to lower my interest rates. Another cool thing I found a mortgage Loan calculator which is also a quite convenient tool to calculate mortgage rates. Thanks for the post! Very informative!
Thanks for stopping by to read and comment. FNMA no longe has the bi-weekly mortgage. Everything mortgage has changed since I wrote this post.
Totally makes sense. Paying just a little more makes a huge difference! Here's another good read on the subject
http://www.sundaybell.com/classroom/should-i-pay-o
Tim
I'm considering making that extra mortgage payment this year. Hopefully, it will save me & my family some money on our mortgage as far as the interest is concerned. Does this work even if your mortgage is upside down?
festersporling1 2 years ago
I have always heard that if you make that one extra payment a year, you knock many years off your mortgage. What you say makes a lot of sense.