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Prepaying your home loanThe home mortgage is the biggest, longest term debt any of us will ever take out. It commits you to paying thousands of dollars for decades, with no room for missing the occasional payment if times are tough. Most of us buy homes and choose mortgages than we can afford - miscalculate, and you risk losing your home in foreclosure when you default on your loan. The opposite approach is paying MORE with each mortgage payment, or prepaying your loan. This is probably one of the best investments you can make, instantly building equity in your home and reducing your mortgage balance. How does a loan prepay work? How can you payoff your home early? Easy. Let's explain. Most mortgages come with a few variables - interest rate, amount, and term.
Benefits of paying of your mortgage earlyWhen you take out a loan, it comes with what is called an amortization schedule. Every time you make a payment, part of your payment covers the interest on the loan, and the rest is applied to the balance, or principal, of the loan. Let's say you borrow $200K and have a monthly payment of $1200. Of this $1200, it is highly likely in the early years that over $1000 per month only covers your interest, while $100-$200 goes to actually payoff the loan. If all your monthly payment went directly to the balance of the loan, you could pay off a $200K loan in $200k/$1200 in 166 months, or just under 14 years. With the added interest, you basically double your loan to 30 years. How much can I save by prepaying my loan? Over 30 years, the vast majority of the money you pay the bank goes to interest - pay that balance off early, and you save all that money. Back to the amortization schedule, which outlines your monthly payments over the life of the loan. In the first month, you pay almost all interest, in the last month, you pay almost all principal. So who benefits by keeping the loan term as long as possible? Your bank - you pay them almost all interest every month, while barely reducing your loan amount, meaning the next month you again pay almost all interest, etc. How do you break out of this cycle? By prepaying your loan.How can I prepay my loan?Prepaying your home mortgage loan is easy. You simply increase the amount of your monthly payment. Instead of paying $1000 per month, you send in check for $1200 per month. Instead of $2600 per month, you send in $3000. How does this help you? All the extra money you pay each month goes DIRECTLY to your loan balance. So if your mortgage is $1200, and maybe $150 goes to the loan balance, if you pay $1350, now $300 goes to the loan balance. By paying just $150 more per month, you have DOUBLED the amount that is actually reducing your mortgage balance -- that is huge. Over the life of a loan, that could reduce a 30 year mortgage to a 23 year mortgage (ie, 7 years of mortgage payments you can spend on whatever you want!) and save you over $60K in interest payments. When you make additional monthly payments on your loan, that money goes directly into the equity you own in your home - you can't lose that unless your home depreciates in value. So this is normally very safe "savings" you make in your own property, and at the same time, you reduce the amount of interest you owe on your property, benefitting you twice. In decades of experience, we have never once heard anyone say they wish they HADN'T prepaid their mortgage, but we've heard MANY complainers wishing after 20 or 25 years that their home was paid off. So take that step - commit that extra hundred or couple hundred dollars per month and apply it your mortgage payment - pay that loan off early, and relax and enjoy those golden years the way they were meant to be spent. After you payoff your loan, your bank will send a lien release document to the County Recorders office in your county, indicating that they release all claim upon your property since the mortgage has been met. You need to be sure you receive a copy of this document from either your bank or the county, so you have permanent record showing no one else has a claim on your property. Also, your bank should send you a statement showing your note or loan balance has been paid in full.Mortgage CalculatorsHow can I figure out how much I owe on my mortgage? How can I calculate how much I will save by prepaying my mortgage? You can download a free trial copy of Mortgage and Finance Pro here. It gives you a whole financial perspective into your life - saving for retirement, saving for college, car loans, home loans, and of course prepayment of home loans. Check it out - you will gain a lot of financial information from this little program.
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