Question: I bought a new home March 30 of last year for $237,900 and paid 20 percent down. I have a separate account into which I deposit money each month for property taxes and insurance. At the beginning of this year I started making an extra principal payment equal to my monthly payment ($1,169.86). Seeing as this was my first home purchase, I financed for 30 years at a fixed rate of 6.25 percent.
If I continue to pay the extra principal payment of $1,169.86 every month, how quickly will I be able to get my mortgage paid off? My goal is seven years. I also plan on putting all bonus and income tax refunds towards my principal. This year that amount was $4,300.
Is my goal realistic? If not, do you have any advice as to how I can meet my goal? I bought later in life and would like to have my home paid for so I can then enjoy my home and my money!
L.R., Everett
Answer: There are many ways to prepay the principal on your mortgage to pay off your loan early. You can double up your monthly payments as you are doing or you could add an extra $100 or $200 to your monthly payment. Or you could use an amortization table and add the next month’s scheduled principal payment to the monthly payment to effectively cut your loan term in half, as I have described in previous columns on the prepaying your mortgage.
In short, any extra money that you pay toward the principal balance of your mortgage, over and above the required monthly loan payment, will reduce your interest expense and result in a shorter loan term.
If your goal is to pay off your mortgage in a certain number of years, all you need to do is enter your loan information into a mortgage calculator to determine the exact amount that you would have to pay each month to pay off the balance in seven years, or whatever time period you choose.
Fortunately, free mortgage calculators are readily available all over the Internet to make this task easy. For example, if you went to my company’s Web site at www.bestmortgage.com and clicked on the mortgage calculators button on the left and then selected the Detailed Loan Payment Calculator at the bottom of the screen, here is how you would figure out the effect of your extra monthly principal payment:
You would enter your loan amount ($190,320) and interest rate (6.25 percent). The term of your loan is 30 years and your first payment month would be May 2006 (30 days after the close of your loan). Then you would select your optional pre-payment method. For this example, I will select “Monthly: Prepay a set amount each month” and enter $1,169.86 as the extra amount you are paying. When I hit the calculate button based on those numbers, I get the following result: You will save $173,734.44 in total interest expense and reduce the 30-year loan term by 21.17 years. In other words, you would pay off your loan in 8.83 years.
But notice that I did not factor in your annual bonus and tax refund payments toward principal, which will further reduce your loan term and your mortgage interest expense.
Play around with the mortgage calculators on our Web site, as well as other sites around the Internet, and you will be able to see how making different principal payments affect your loan term and total interest expense.
Based on the quick calculation I ran in the example above, you are pretty close to hitting your target payoff date of seven years. Just keep playing with the numbers until you come up with a payment that accomplishes your goal. Or maybe you will decide to stick to your plan and pay off your home in 8-plus years. The choice is up to you.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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