Reduce your mortgage by pre-paying principal and eliminate your interest.

Reblogger
Real Estate Agent with Hillscape Properties, Inc. DRE#01452976

The best advice my father-in-law ever gave me was to make one extra house payment per year.  You can calculate the difference that advice can make in the stellar blog here.  Bankrate.com also has calculators that will help you model the amortization tables when you add extra payments.  You can also divide that one extra payment by 12 and add that to your monthly payment.  Be sure to read your loan terms to make sure there are no prepayment penalties.

Original content by Mike Cooper, Broker VA,WV, MD 0225086119

Homeowners know that a mortgage is a great way to buy a house.  But, too many don't realize just how much a mortgage can run the price of house up over the course of a loan. 

If I told you that I would sell you a $200,000 house for $364,813.42 you would never do it, but a 30 year mortgage can run the purchase price of a house up $164,813.42 in interest at 4.5% over a 30 year mortgage.

There are ways to reduce that number that are simple and within reach.  Anytime you take out a mortgage, make sure you have the privilege of pre-paying principal without penalties.  Let me show you how this works.

Let's start with a $200,000 mortgage with the first payment beginning January 1st.  Interest is loaded on the front of your mortgage, so your early payments are predominately interest.  Let me give you an example.  Payment one is $1013.37.  Of that fee, only $263.37 is paid on the principal.  The remaining $750.00 is interest.  On month 2, your second payment is $1013.37 of which $264.36 is principal and $749.01 is interest.

                

So, in two months, you have paid $527.73 in principal and $1499.01 in interest.  Now, if you add the principal of the second month with your first payment you can skip the interest on payment two.  So, on January 1 you would pay $1277.73.  That eliminates $749.01 in interest from your loan.  

In February, you would pay payment 3Payment 2 has been paid with the January payment - minus the interest which you won't ever pay.  In February, if you paid the principal of month 4, $266.34, you can skip the interest of $747.03.  In two payments, you have reduced your overall mortgage costs by $1496.04 in interest.  If you repeat that every month throughout your mortgage, you can radically reduce the overall interest costs of your mortgage.  There is another way to pay your mortgage off early and reduce the overall interest.  I'll show that in the next blog.

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Mike Cooper, Real Estate Broker, Winchester, VAGive me a call for all your real estate needs, and let's make something amazing happen. 

Mike Cooper @ Cornerstone Business Group, Inc., 888-722-6029


Real Estate Sales and Property Management         

 

(Disclaimer:  All grammatical mistakes, punctuation breakdowns and misspellings are purely for your amusement and entertainment.   Feel free to cackle.)                                                                                                

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Comments (8)

Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

I agree with the philosophy.  Get a 30 yr loan and pay like a 15.  If something happens to you drop to the lower interest.

Mar 30, 2013 03:23 AM
MichelleCherie Carr Crowe Just Call...408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

Yes that is the best way to approach paying off a mortgage early.

Apr 03, 2013 04:11 PM
Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional
Charles Rutenberg Realty - Clearwater, FL
Palm Harbor, Dunedin, Clearwater, Safety Harbor

This is indeed wonderful information to get out to all of our clients.

Apr 03, 2013 10:43 PM
Melanie Narducci
Hillscape Properties, Inc. - San Francisco, CA
Your San FranciscoBay Area Real Estate Expert
Thanks for your comments! Sometimes it's a good idea to get back to the basics.
Apr 04, 2013 04:30 AM
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hi Melannie - this is something I share with any of my buyers who are obtaining a mortgage -- so many possibilities to reduce the amount of interest you pay.   I can think of dozens of other things to use those extra dollars for rather than giving it to the lender.   

Apr 10, 2013 12:41 PM
Melanie Narducci
Hillscape Properties, Inc. - San Francisco, CA
Your San FranciscoBay Area Real Estate Expert
Thanks for the comment, Michael! I can think of more than dozens of things one can spend those extra dollars on. Bankrate.com has a great amortization calculator that allows you to show how an extra payment a year will impact that remaining balance, it really opens buyers eyes.
Apr 10, 2013 11:47 PM
Lisa Friedman
Great American Dream Realty - Essex, VT
30 Years of Real Estate Experience!

Good post.  I once had a 30 year mortgage paid down to 8 years within a few years by adding extra commissions to it when I had them to spare.  $3k here, $2k there.  It really added up.  Wish I had kept it.  It would be free and clear now.

Jun 27, 2013 11:42 AM
Melanie Narducci
Hillscape Properties, Inc. - San Francisco, CA
Your San FranciscoBay Area Real Estate Expert
I'm all about paying it down, Lisa! With the right loan, even if you pay off just a few bucks a month that all goes to principle and lowers the interest owed.
Jun 27, 2013 11:09 PM