SL 4: Paying Extra Reduces the Loan Balance
paying more on the principal reduces the amount of interest paid
The goal is to reduce the total amount of interest paid by accelerating your mortgage payments
By paying an amount greater than your current mortgage payment, you can reduce the total amount of interest paid and pay off your mortgage faster.
Example:
if you made a lump sum payment of $50 every month, you can reduce your mortgage obligation as follows(two examples shown: $100,000 and $200,000 mortgage)
$100,000 Mortgage 30 Year Term - 6% APR |
Monthly Lump Sum Payments | |
$0 | $50 extra | |
Total Payments | $215,838.19 | $191,268.99 |
Total Interest Paid | $115,838.19 | $91,268.99 |
Total Principal Paid | $100,000.00 | $100,000.00 |
Total Interest Saved | $24,569.99 | |
Mortgage Payoff Time | 30 Years | 24.58 Years |
$200,000 Mortgage 30 Year Term - 6% APR |
Monthly Lump Sum Payments | |
$0 | $50 extra | |
Total Payments | $431,676.38 | $403,797.07 |
Total Interest Paid | $231,676.38 | $203,797.07 |
Total Principal Paid | $200,000.00 | $200,000.00 |
Total Interest Saved | $27,879.31 | |
Mortgage Payoff Time | 30 Years | 27 Years |
There are three conventional ways to accelerate your mortgage payment:
- automatic draft of a lump sum payment:
where you send in a lump sum payment on a scheduled basis
- bi-weekly accelerated payments:
where you cut your monthly mortgage payment in half and pay it every two weeks
- refinance your mortgage:
where homeowners refinance their mortgage at a lower rate and/or lower term