Buying a house is the most expensive thing most people will ever do. Almost 70% of Americans now own their own homes, and that is an all time high. But the commitment to buying a home is a great one; the payment schedule can run as long as forty years, the interest charges will exceed the cost of the house itself and the payments need to be made each and every month. It is no wonder that people who finally pay off their mortgages often throw parties to celebrate.
And while this commitment is a long one, it doesn't have to be as long as you think. The mortgage document may say that the term of the loan is thirty or forty years, but there is nothing to prevent you or any other homeowner from paying it off sooner. True, most Americans are already paying as much as they can for their houses, but it really isn't all that hard to cut several years off of the life of the home loan. All it takes is a little bit extra each month.
The typical amortization schedule for a home loan provides for an even number of payments that consist of an identical sum of money each month. But the size of the payment is misleading. Each payment consists partly of mortgage principal, partly of interest, and partly of taxes. In the early years of the mortgage, most of the payment is interest, with only a small portion being applied to the principal. In later years, when most of the interest has been already paid, a larger portion of the payment will apply to the principal.
By adding just a little bit to your payment each month, such as $20 or $50, the term of the mortgage can be reduced quite a bit. As the principal is reduced, so is the interest that is due on the remaining balance. This compounds over time, reducing the overall time of repayment. An extra $50 each month on a $200,000 mortgage at 6.5%, for example, will cut more than three years off of the repayment schedule. Even an extra $20 on the same loan would cut 16 months off of the loan and save more than $14,000 in interest.
Don't think that you cannot pay off your mortgage sooner just because you don't have a lot of extra money. It only takes a little bit to make a difference.
About the author: ©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including HomeEquityHelp.com, a site devoted to information regarding mortgages and home equity loans .
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