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Mortgage Secrets: Owning Your Home Faster & For Less - Friday, November 01, 2013
Seeing a mortgage amortization schedule for the first time can be overwhelming.  Most of us are surprised at how much money goes to interest at the begging of the mortgage and how little actually goes to the amount borrowed, or the principal. 

Fortunately, there is great news for homeowners who organize their finances and take control of their payment plan.  Understanding how to structure your payments can significantly reduce the total number of payments and the amount of interest you pay on your loan; here’s how it works.

What is a mortgage amortization schedule?
This is a complete schedule (payment plan) of your loan payments which breaks each monthly sum into the specific portions applied towards interest and to the principal.  A 15 year mortgage will include 180 payments and a 30 year mortgage will have 360 payments.

Payments aren’t equal:
Most of your payment is applied towards the interest at the beginning of the loan; which means that making extra principal payments at this time will really knock your mortgage down (by the number of years on your mortgage and in how much interest you pay).  Toward the end of the loan, more of your payment is applied to the principal than interest so additional principal payments aren’t as effective.  The schedule will detail how much of your payment is applied to principal and interest for every single payment in the duration of the loan.

Where is the good news?
By starting early and applying additional money to the principal on your house note, you can cut years off your mortgage and save thousands of dollars in interest.  You can make extra "principal only” payments, pay bi-monthly or increase your monthly payments.

How much can be saved?

On a $150,000 mortgage financed at a fixed rate of 4.25% for 30 years, paying one extra payment a year (either one payment of $738 or an extra $61.50 month) will cut your mortgage by almost 4 1/2 years and save you almost $20,000 in interest.  Applying an additional $38.50 to that amount (for total of $100 extra monthly) will shave over 6 years off your mortgage and save you over $27,000 in interest.

Make sure your payments are applied to the principal!
Inform your mortgage holder that you will be making additional principal payments to ensure that the money is applied to your mortgage properly.   Many lending institutions will apply extra payments to the next month’s mortgage payment, so make sure that your lender understands what you are doing.  It would be a great idea to verify this again with your mortgage holder after a couple of billing cycles.  Check that you are not subject to a "prepayment penalty” and you should not have to enroll in a fee-based program to make pre-payments.

Want to check it out?
Visit Neighborsfcu.org/calculators to see how extra payments can save money on your mortgage now!

 

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