Here's a
Tip that I'd like to pass on to you.
If
you have a mortgage, or plan on getting one, you will want to read on!
A little extra money paid toward your principal Now can translate into BIG
SAVINGS Later*.
Here's why it works:
Lenders typically collect most of their interest on a loan first and the
principal later.
Example: for $100,000 borrowed at 8.0% for 30
years the payment is $733.76.
The 1st payment looks like this, $67.09 to Principal & $666.66 to
Interest = $733.76.
The 2nd payment looks like this, $67.55 to Principal & $666.21 to
Interest = $733.76.
The 3rd payment looks like this, $68.00 to Principal & $665.76 to
Interest = $733.76.
The Last Few payments look like this, $724.07 to Principal & $9.69 to
Interest = $733.76
provided you pay exactly the $733.76 each and every month of the loan.
By
paying a little extra toward the Principal ahead of time, there is a
large savings of Interest and the life of the loan is reduced.
Here's
how it works:
Making one extra payment toward principal each year will reduce the life
of a 30 Year
fixed rate mortgage loan by approximately 7 years is a "typical rule
of thumb"!
This
can be done by either sending in the equivalent of 1 months payment (in
the example $733.76)
additionally to the lender once a year or by sending in an additional 1/12
of the payment
each month (in the example $61.15). Any additional payments
should be clearly marked "To Be Applied To Principal Only".
So
how much does this save?
In the example the number of payments is reduced from 360 to only 275!
That's over Seven Years!
The total interest paid is reduced from $164,155 to $118,245
approximately.
That's a SAVINGS of $45,910!
And even if the loan is paid off early, Interest had been saved and Equity
had been increased. SAVINGS are even better with higher loan
amounts.
As
a note, It is not necessary to send in exactly 1 extra payment a year.
It was used in this example
because it was easy. Any amount, More or Less than one months
payment, will help
(of course the savings of interest and time will change depending on the
amount of prepayment).
*
This may not apply to loans with a PrePayment Penalty, however many fixed
rate loans don't have this penalty. Your lender loan servicing department
may or may not be setup to take advance payments and that's where the
Biweekly payment service plan is required because they use a FDIC wire to
guarantee additional payment is applied and audited.
