Here is a good example based on the scenario of an average family.
If you are an average family of four making $50,000 a year, let us assume that you are saving annually at the same rate as most Americans. This rate of savings as reported by our government is about 4% of your income every year. This would mean that you are putting $2000.00 in the bank every year for future purposes. This comes out to around $167.00 a month.
Right now you are probably receiving less than 1% Annual Percentage Rate (APR) on your passbook savings.
Why not take $100.00 of this money that you would normally save and pay down the mortgage on your home ahead of time? The following example shows why this is in your best interest.
If you take out a mortgage on a house for $200,000 at a 6% fixed rate, and the contract calls for repayment in monthly installments over 30 years, your monthly mortgage payment would be $1,210.56.
If you paid an extra $100.00 dollars per month toward the amortization of your mortgage, you would add $1,200.00 to the equity in your home every year.
In this scenario, the total amount paid to buy your home over the life of the mortgage would be $435,798.89. When you add $100.00 to your mortgage payment every month you would save $46,360.13 in interest charges over the life of the mortgage. You would also be able to retire your mortgage earlier.
You would be able to trim 38 monthly payments off your repayment of the mortgage. So the mortgage would be paid off 3 years and 2 months sooner if you use this repayment method.
In short, what this strategy does is shift your money from passbook savings only ($2,000.00 per year), to paying $1,200.00 on your mortgage, and saving $800.00 directly into your bank account each year.
To sum up the benefits of using this method, the borrower in the example above saved $46,360.13 in interest on their loan, and accumulated $21,923.85 in passbook savings ( $67.00 per month X 1% APR X 322 months ). This equals $68,283.98 in accumulated savings over 26 years and 10 months (This is the actual time it would take to pay off the original 30 year mortgage).
If the family would have put all of their money ($167.00 per month) in a passbook savings account only, they would have accumulated $54,646.35 over the same period of time.
So this family would have actually saved $13,637.63 more by using this accelerated payment method. And they would have also paid off their mortgage 3 years and 2 months earlier than normal.
This method can be used in any situation where the mortgage has an Accelerated Payment Clause built into it. It will work best if you are consistent with the amount that you pay on your mortgage every month. Any change in the amount of monthly repayment of the mortgage will affect the amount that you will actually save.
Check with your banker to find out if your mortgage allows for Accelerated Payments. Then you can use this strategy to save a lot of money on your mortgage and own your home sooner.
For further information please visit my Hutchinson Kansas Real Estate Website.