You Can Save Thousands Of Dollars Paying Off Your Mortgage Early
Posted on April 15, 2009 in the Mortgages category
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In these days of severe economic recession, it is unlikely that one of the top priorities on your mind is paying off your mortgage early. Most people in the country are just fighting to hold onto their homes by avoiding the huge balloon payment that is looming in the future.
This is not some gimmick or false promise but is based on real mathematical calculations that are not too difficult to understand. Instead of getting out a calculator or going to a website that can instantly calculate an early mortgage payoff, we can take a hypothetical house and mortgage and work with that information.
However, if you are fortunate enough to have kept your home despite the recession or have owned your home for many years, this topic should be of interest to you. Your 30 year fixed rate mortgage can be reduced by many years if you were to add a small additional monthly payment regularly.
Cutting years off your mortgage term is not some type of trick, but a real scenario that can be understood using basic math. To better understand this principle we can use some imaginary numbers to represent a mortgage. There will be no need for us to visit a website that can calculate an early mortgage payoff.
So the formula would be $200.000 divided by 360, which would equal $555.56. The $555.56 figure is the amount paid each month that equates to the average principle paid out over the life of the loan. You might be thinking that if you were to pay an additional $555.56 per month that you could pay off your mortgage in 15 years instead of 30.
Our next move would be to divide the principle mortgage amount owed by the months left to completely pay off the mortgage. If we were to assume this is a new loan the months would be 360, which would equal 30 years.
We would arrive at a formula that would look like the following: $200.000 divided by 360, which equals $555.56. The monthly amount that averages out to be the principle over the life of the loan is $555.56. You might be concluding that if you were to simply pay the additional $555.56 on a monthly basis you would cut your loan term from 30 to 15 years.
Hardly anyone has that discretionary money. But many people have a small amount that they could pay and it would significantly decrease the overall length of the mortgage term. We now know that an additional $555.56 monthly reduces your mortgage term by 16 years and 2 months. You can pay off your mortgage in 22 years & 8 months by taking the $555.56 example specified and dividing it by one quarter, which equals an additional $138.89, monthly. Your 30 year mortgage has now been reduced by over 7 years off its original term!
For an added mortgage payment of less than $140 per month, that’s not bad. Paying off your mortgage early is the point of this exercise and it’s just a means to get you thinking how adding a little extra money monthly helps. Hopefully, you now understand that an early mortgage payoff can be achieved rather easily.
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While you are correct in the fact that paying off yru mortgage early will save money on interest many people revinance their homes and continue to pay a mortgage as it gives them a write off on their taxes. Before you pay off yoru mortgage you should contact a tax consultant or CPA to discuss the benefits and ramifications.
With the ways things are, paying your mortgage off early is definitely worth it.
Rick