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Faster Payoff

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Posted On: 10/18/2017

Question: We’ve received an annual update from our lender with a lot of current mortgage information. The update shows our balance, mortgage rate, original loan amount and payoff date. It’s the last item that is terrifying – it says our mortgage will be repaid in 2044 – that’s 307 months from now. What can we do to pay off our mortgage in a lot less than 27 years?

Answer: The odds are your loan will last much less than 27 years. According to the National Association of Realtors, in 2016 the typical home was sold after 10 years of ownership while Freddie Mac says that in the first quarter the typical loan was refinanced after 7.6 years.

In your situation let’s assume you want to stay in the property as long as possible but that you also want to get rid of your mortgage payments sooner than later. Here are some approaches.

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Look at a loan amortization statement – you can create your own with an online mortgage calculator. Each monthly payment consists of principal and interest, but in the early years of the mortgage most of the payment goes to interest. For a $150,000 mortgage at 4.25 percent and a term of 307 the monthly payment will be $802.22. The first payment will be divided with $271 for principal and $531 for interest.

One approach is to make an additional principal payment each month. If you pay $1,074 ($802 plus $271, rounded) a month the loan balance will be repaid in 193 months – a little more than 16 years. Throw in an extra $50 a month, pay $852, and the loan can be repaid in 276 months (23 years).

Some suggest that you might benefit from a bi-weekly payment schedule. If you make a $401 payment every two weeks you will pay $10,426 a year to the mortgage company ($401 x 26). A much easier idea is to make 12 payments of $868.83 ($868.83 x 12 = $10,426). With most loans today you can make a larger monthly payment by simply writing a bigger check and checking on the payment form where it says “extra principal.”

Notice that there is no cost or “program” to make a basic additional payment for most mortgages. Your currently loan likely allows you to readily make such payments without any hassle or complications. In effect, regular prepayments can be seen as a kind of savings plan, one that means less debt each month.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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