Loan Articles

You may find it surprising that it is actually possible to cut the pay-off term of a thirty-year mortgage by one third or more. Moreover, it is possible to do this without any refinancing, higher monthly expenses or signing up for a debt consolidation program. On the other hand, homeowners have good reasons to desire an early payment of their mortgage loans – calculations show that by paying off a thirty-year mortgage in ten years or less, one can save close to quarter of a million dollars on interest rates.

Keep reading if you are looking for advice on how to save a fortune on extra fees and bulky annual interest rates by paying off your mortgage well ahead of its term.

Payment toward Outstanding Balance

The first step towards the early repayment of your mortgage is to put extra funds against the balance as soon as you can. In other words, you can significantly lower your interest cost by putting more cash towards the principal.

The Front-load Problem

However, the sad truth is that an insignificant amount of what you pay off during the first year of your mortgage goes towards the principal. This is due to a negative phenomenon called front loaded interest, which can reach the breath-taking 500 percent over the first year mortgage. In other words, if you pay off $10,000 in the first year, slightly over 1,000 dollars will go against the principal and the rest will go in the bank’s pocket. It is typical for most mortgage lenders in the United States and Canada to front-load the interest over the first years of their customers’ mortgages. You need to know that the front-loading problem will deepen if you sell or refinance your mortgage over the first three or five years.

Reduce Debt

In order to be able to put more money against the principal, you have to reduce your other debts. In this line of reasoning, you should try to use your credit cards sparingly and refrain from shopping sprees and reckless spending. Think of the many occasions when you’ve purchased a luxury item and tried to return it a couple of days later. Each time you are about to buy something that is beyond your means (you obviously can’t afford it since you use credit), think of emergency situations where you really need the money.

Switch to Saving Mode

If you have a bulky mortgage to pay off, you’d better switch your mind to saving mode. You already have a huge reasoning, you should try to use your loan to service - visiting Paris is not a wise investment of your income. By cutting down unnecessary expenses you will be able to apply the saved money to the payment of your mortgage. It will be even better, if you look around for a better-paid job, even though that may sound too optimistic in times of economic crisis, or find some other way to increase your monthly incomes. You have one of two options or both – save and earn more.