How do you accelerate your mortgage payoff?
To begin with, you can send in extra mortgage payments at any time. Extra payments will, hopefully, be applied to the principal only, saving you a fortune in interest payments.
Here are some methods to make those extra payments work to your advantage and to make sure you get the most credit for any additional monies you send in.
1. Always make your regularly scheduled payment and be certain to make it on time.
2. Send any additional monies as a payment separate from the regular monthly payment.
3. Along with the extra payment, include a letter spelling out exactly what you want done with that additional money.
Amortization Schedule
When you purchased your property, your closing paperwork included an amortization schedule. If you have an online mortgage account, your schedule can also be found there. This amortization sheet lists every payment you are scheduled to make for the life of your loan.
Your schedule breaks down each payment by payment number, amount applied to principal, and amount applied to interest. By paying ahead, you can pay the principal amount only and the interest amount due on that payment is forgiven. This can create huge savings.
The best time to make additional payments is at the beginning of your loan, the first year, if possible.
Example:
Make your first scheduled mortgage payment. Determine how much extra you can send in. Look at the amortization schedule and find how much the principal-amount-only is for the upcoming months. Along with your first scheduled payment, add a second check and a letter stating exactly what the extra check is to cover: i.e., the principal amount for payments number two, three and four.
The following month, when your second payment is due, you must mail that payment in on time, however, it will now be payment number five on your amortization schedule rather than payment number two. You have just saved the interest that would have been charged for payments number two, three and four!
Note: if you have an online mortgage account, your amortization schedule will change every month to reflect the amounts, including any additional, that you send in. By watching online, you can make sure your extra payments are applied correctly.
Repeat
Repeat as many times and as often as you can. The earlier in your loan you begin this process, the more you will save because, in the beginning of any loan, the payments are applied mostly to interest and very little to principal. Your payments increase in principal and decrease in interest every month. On a 30 year mortgage, is not until somewhere around year 22 that the principal and interest balance out and each makes up near 50% of the total payment.
Caution: you must continue to make regular monthly payments when due. Just because you’ve gotten ahead on the amortization schedule does not entitle you to skip any payments. The advantage of additional payments is the opportunity to pay off your loan years earlier and save thousands in interest charges.
Attached is a great calculator allowing you to plug in your own numbers and see the results for yourself. Believe me, this process works! Mortgage Payoff Calculator
Good luck and let me know how accelerated payoff works for you!
