Mortgages Don’t Have to Be Eternal

You know how much you had to borrow to buy your house, but do you know how much that mortgage is really costing you? Probably more than you imagined. For example, let’s suppose you took out a loan of $80,000 at 10 percent interest, and you plan on paying off the loan in 30 years. When you multiply your monthly payment of $702.06 by 360 (the total number of payments), you end up paying $252,741 for your home. That means you spent an extra $172,741 on interest!

You can lower this expense if you cut down on the number of years you finance your home and increase the amount you pay on the principal of the loan each month. Following are several ways to do this. Each example assumes that the original amount loaned was $80,000 and that there are no prepayment penalties. In most examples listed, the final payment is less than the regular monthly payment.

Make two principal payments each month instead of just one. To each month’s installment, add the principal portion of the payment whose payment number is twice the current payment number on your amortization schedule. For example, add the principal of payment number 2 to payment number 1, the principal of payment number 4 to payment 2, and so on. You will pay off your house in fifteen years. If your initial loan is for $80,000, you will save about $86,201.
Make two principal payments each month until payment 45 in your schedule. After that, add $75 of additional principal to each payment until you pay off your mortgage. This lets you retire your loan in twenty years, four months, and you will save $64,564 on the same loan of $80,000.
Make two principal payments each month until payment 63. Then pay $100 additional principal each month. You will pay off your loan in nineteen years, two months, and you’ll save $70,678.
Make two principal payments each month until payment 104, then add $200 additional principle to each payment until payoff. Your mortgage will be paid in sixteen years, eleven months, at a savings of about $81,169.
Pay $10 additional principal each month the first year, $20 the second year, $30 the third year, and so on until payment 108. Then pay an extra $100 principal with each payment. You will finish your payments in twenty years, nine months, and you will save approximately $58,750.
Add $10 principal each month the first year, $20 the second year, $30 the third year, and so on until payoff. You’ll pay off your mortgage in nineteen years, nine months, and save about $62,000.
Pay $15 extra on your principal each month for the first year, $30 the second year, $45 the third year, and so on until payoff. Your loan will be paid in seventeen years, nine months, and you’ll spend $74,156 less on interest.
Add $20 of principal to each payment the first year, $40 the second year, $60 the third year, and so on until payoff—which will come in sixteen years, three months. You’ll save about $82,774.
Pay $25 extra principal each month the first year, $50 the second year, $75 the third year, and so on until payoff. You’ll pay for your house in fifteen years, one month and save about $89,340.

No matter which method you choose, you must make it clear to the lender that you are adding additional principal to your monthly payments. Many payment coupons include a blank space in which you may indicate payment of additional principal amounts.

The payoff periods and the amount of interest you save will be proportional to the original amount of your loan. Whatever additional principal you can pay on a consistent basis will save you a great deal of money on interest and will shorten the life of the mortgage.—Kimo D. Wood, Church Real Estate Division