How to Reduce Your Mortgage

One Additional Mortgage Payment a Year

There's a simple trick to significantly reduce the length of your mortgage and save you thousands of dollars. The trick is to make one extra mortgage payment a year and apply that payment toward your loan's principal. This can as one lump sum payment or divided amongst 2-12 months each year. The idea is by paying down the principal you save a great deal of interest payments.

This is the method being used by third party companies for a fee. You do not need to pay a third party for this. You can do it on your own. It is important to tell the lender to apply the extra payment toward the principal balance.

Example: $100,000 loan, 30-year mortgage, 6.5% fixed interest rate

One-time Payment

It may not be possible for you to increase your monthly mortgage payment. Keep in mind that most mortgages will permit you to make additional payments to your principal at anytime. Perhaps, five-years after moving into your home you receive a larger than expected tax return, or an inheritance or a non-taxable cash gift. You could apply this money toward your loan's principal, resulting in significant savings and a shorter loan period.

Example:

With a $100,000, 30-year, 6.5% fixed interest rate mortgage loan, the borrower will pay a total of $227,542.98 to pay back the loan in 30 years. That equals $127,542.98 in interest payments.

If the same borrower makes a one-time $5,000 payment the first day of year 6, he/she will pay a total of $204,710.75 and pay off the loan in 27 years (324 months). That's a savings of $22,832.23 in interest.