BENEFITS OF MAKING ADDITIONAL LOAN PAYMENTS

Updated: Dec 18, 2018



Thirty years is an awful long time before your mortgage is paid off. One way to reverse this reality is by making additional principal payments to the loan. In the beginning of the loan, the bulk of your payment is going toward interest or in other words paying the bank their money first. Therefore, the more money you add toward the principal, the less interest accumulates in subsequent payments. Thus you’ve just allowed more money to line YOUR pockets in the long run.

There are many reasons why people consider paying off their mortgage. They may want to be debt free by a certain age to assist with attaining financial freedom or they may simply want the mortgage paid off well before retirement.

BENEFITS OF ADDITIONAL PAYMENTS

With making additional loan payments, you lessen the amount of interest paid to the bank and you lessen how long you have to pay the bank back.

Let’s take an example:

You make monthly payments on an $200,000 30-year loan that charges 5.25% interest. Your payment is $1,104.00. The total interest payments you would have made by the end of the 30-year term is $197,586.00. That’s basically TWICE the amount of the mortgage you took out.

Let’s say you decide to make an additional payment of $100 per month to the principal only. The interest paid to the bank will automatically drop to $157,682.00. You not only saved $39,904 but you’ve lessen the term by 5 years and 3 months. Now are you winning or are you WINNING? But, imagine if you add more to the principal? Oh, the difference that would make.

Check out www.bankrate.com, play around with some estimates, and see what can happen.

PREPAYMENT PENALTY

Ideally before you are committed to the loan, make sure that the bank does not charge a fee for prepaying the loan. Some banks usually add this clause to secure a certain amount of profit from interest. If you pay off the loan earlier than the expected term, you’re putting more money in your pocket and taking it from the bank (and of course they don’t like that but ahh well!). If there is no prepayment penalty, then go for it. Win over the bank for a change!

MAKE SURE IT’S GOING TO THE PRINCIPAL

When deciding to make extra payments to your loan, make sure the bank teller or loan officer is clear on the fact the extra payment is going toward the principal only. These banks act crazy sometimes and put the additional amount to next month’s payment or some late fee. I always recommend that you double check online after the posting has been cleared just for extra precaution.

WAYS TO PREPAY

There are several ways that can be used to prepay your loan.

1. Bi-weekly – Let’s say you get paid twice per month. If (and this is a big if), the bank allows you to pay your mortgage as you get your salary every two weeks, then go for it. Also make sure that the bank doesn’t charge an extra fee for this service and be certain that they are actually applying the payment every 2 weeks. Remember there are 52 weeks in a year and 4 weeks in a month. So with biweekly payments, you’re making 26 payments i.e. 13 months’ worth of payments. If the math is a little fuzzy here just know that paying once a month gives you only 12 months’ worth of payments, but biweekly gives you 13 months.

2. Divide 1 month’s mortgage payment – Doing this would actually allow you to pay 13 months’ worth of mortgage payments in 1 year. Let’s say you’re making a $1,500 mortgage payment, then divide that by 12, and make your monthly payment $1,625. Just ensure the extra $125 is going to the principal.

3. Bonus/Lump Sum – Some companies pay a bonus in December (or whenever they pay it at your company), if this happens in your case, a portion of the bonus can be added to the principal of the loan.

4. Pay whatever additional you can per month – no seriously, if you can only afford to make an extra $20 or $50 payment, then do it. A little can go a long way!


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