How to pay off a 30-year mortgage without really feeling it!
Nearly 8 out of 10 homeowners have a mortgage that is amortized over 30 years. Most of that thirty years is spent paying off the interest on the loan. Did you know that on $200,000 30-year mortgage at 7%, over the life of the loan nearly $400,000 will be paid in interest alone? There are a number of very easy strategies that can be used by the average homeowner that can take years off a thirty year mortgage!
The 13th Payment
The 13th payment strategy is a great way for homeowners that don't have the discipline to make additional principal payments on a monthly basis. The 13th payment strategy is basically making an extra monthly payment toward the principal balance of your mortgage once a year. If you were to utilize this method of paying off your mortgage early, a 30 year mortgage could be completely paid off in 17-22 years depending on the loan terms and amount applied toward principal.
It works like this: On your monthly mortgage statement take either your principal and interest amount or the total house payment (PITI), and once a year make an extra payment applied toward the mortgage's principal balance. It is very important to specify that the extra payment goes directly toward principal. Include a note with your check with those specific instructions. Disciplined people do this in November because they haven't spent money on holiday gifts yet. Most people try this in January because it's easier to remember.
Example:
- $200,000 Mortgage at 7% over 30 years
- $2400 annual property taxes and $600 a year for homeowner's insurance
- $917 P/I + $125 Taxes + $33 Insurance = Total Monthly Payment $1434
Once a year, send in a separate check with a note saying "Apply Toward Principal Balance" for either the $1184, $1434, or what you are able to afford, or $100 each month applied toward principal will accomplish virtually the same thing.
Bi-Monthly Mortgage Payments
Nearly all lenders have the option of direct withdrawal of your mortage payment from a savings or checking account. Most will also have the option of doing this twice a month with half the amount taken out. Typically there is a an initial set-up fee involved ranging from $150-$300.
Bi-Monthly payments work like this: lenders are required to calculate interest to the day a payment is received, not on the due date. By making two $500 payments for your actual $1000 a month payment, your interest is paid off early. Depending on the terms of your mortgage, using Bi-Monthly strategy should cut your 30-Year mortgage by 8-10 years.
Example:
- $200,000 Mortgage at 7% over 30 years
- $2400 annual property taxes and $600 a year for homeowner's insurance
- $917 P/I + $125 Taxes +$33 Insurance = Total Monthly Payment $1434
Your lender will set up an automatic withdrawal from a savings or checking account for approximately 1/2 of your actual monthly payment. Make sure you keep track of your balance to avoid any overdraft charges. Contact your lender's customer service center for more information.