Pay Down Your Loan Early
There are several ways or techniques to pay as much as possible to your mortgage loan, as fast as you can. Mortgage loans are amortized with compound interest, not simple interest. This means that the proportions of principle and interest paid to your loan each month is based on the outstanding balance of the loan. Furthermore, outstanding interest is ALWAYS paid first and the remaining portion of your payment can be used to reduce the principle balance. Therefore, if you pay more money towards the principle balance, the less interest you will pay over the life of the loan. Finally, doing this will assist in paying off your loan faster.
Tips to pay off faster:
- Budget each month as if your payment is $100 higher than it actually is.
- Set up your mortgage payment to happen automatically, with the higher amount you’ve budgeted for. Any servicer will auto draft a checking account for the amount you tell them to take.
- If you want to pay even more because you happen to have extra dollars, do this at the same time as your payment is normally made. Remember interest, and the portions of your payment that are to be applied to escrow will always be paid first. Making extra payments at the time your normal payment is due will insure that those items are all caught up and that the rest of your hard earned dollars are applied to the principle balance of the loan.
- Make bi-weekly payments. If you are paid bi-weekly, there are always 2 months out of the year where you get 3 paychecks instead of 2. Those 2 extra paychecks per year equate to 1 extra mortgage payment per year. This can cut up to 4 years off of your loan.