Saturday, September 10, 2011

How to Shorten Your Mortgage By One Month

Most people know that you can shorten the duration of an ordinary home mortgage by making extra payments, paying more than the minimum that the mortgage requires. But how much shorter is the loan getting as a result? This doesn’t require any mysterious financial mathematics to figure out if your bank provides online statements for your mortgage account.

A mortgage account statement tells you what part of each payment goes to pay interest. The rest of the payment is the principal payment. This is the part of the payment that reduces the loan balance.

For example, for my latest monthly mortgage payment of $491, the bank shows that I paid $331 in interest and $160 in principal.

To shorten my mortgage by one month, I just have to pay that same principal amount again as an extra payment. That is, if I pay an extra $160 now, I can skip the final payment of $491. I’ll do the fancy financial mathematics for you: that’s a 67 percent discount as a reward for paying early.

It’s as simple as that when you are making your first extra payment. To shorten your mortgage by a second month, you‘ll have to pay slightly more, because you’re getting closer to the new final payment. For example, I would pay about $161 to shorten my mortgage by another month. This amount increases gradually until, when you have only three months of payments left, it’s almost as much as your scheduled monthly payment.

If you are just starting out on a 30-year mortgage, though, it can be surprising how easy it is to shorten the mortgage by a month at a time. That amount is just the principal amount of the regularly scheduled payment.