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Reduce Principal Faster

For most of us, our home is our single largest investment. While it is our largest form of equity, it is also our largest drain in interest payments. So how can you reduce your interest payment while increasing principal? If mortgage interest rates have dipped significantly since you originally secured your loan, then refinancing may be your best option. However, if refinancing isn’t an option, there are other ways to reduce the principal and interest payments during the life of your loan that could save you thousands of dollars.

Consider the following scenario:

– Monthly mortgage payment (12 months/12 payments): $997
– Interest paid over the life of the loan: $209,263
– Paid off in 30 years

In order to achieve savings, simply pay an additional loan payment dedicated to principal only. Using the above example with a mortgage payment of $997, you would add $83 a month ($997 divided by 12) toward the principal (you will need to specify the extra amount for “principal only” on your payment.). This would raise your monthly payment to $1,080. Interest savings over the life of the loan are $53,325 – paid off in 22-23 years instead of 30 years!

Another option to consider is paying half your mortgage every two weeks instead of a full payment once a month. This can be done with most any type of loan, but is most common with a 30-year fixed-rate loan. Doing so pays your mortgage more quickly because you pay the equivalent of 13 months of payments each year. For people who can budget to make a half-payment every two weeks, this offers more rapid building of equity.

Because your payments are applied to the loan every 14 days, the principal amount decreases faster, saving you more in interest costs. Your loan term shortens to 22 or 23 years, providing a substantial decrease in total interest costs. For example:

– Half payment (13 months/26 payments): $498 ($997 / 2)
– Interest paid over the life of the loan: $155,938
– Paid off in 22-23 years

Interest savings over the life of the loan are $53,325 – paid off in 22-23 years instead of 30 years! Use our extra payment calculator to determine how much you can save by increasing your monthly payment.