There is a simple step to help you pay off your mortgage that most consumers do not take.
I have touched upon this topic before in my Delving into Paperwork posts, yet this idea of paying down a mortgage is not too common. It really is so basic that people overlook it. I have even heard of it referred to as a “secret”.
First, you have to understand how your morgage works. This technique works with a standard fixed rate mortgage. You borrow money from the bank. They come to an agreement with you over the terms of the loan. It could be 6% interest over thirty years. They tell you what your payment will be per month. Those are the primary numbers most of us study when comparing mortgage offers. Sometimes there will be a penalty if you pay off early, so you will need to ask about this when applying for the loan, or check your paperwork if you have the loan already.
We know the amount of the mortgage payment each month; however, we may not look at how it is applied. Your payment could stayed fixed over the life of the loan (not likely, but for this thought experiment we will assume that it does). You might assume that a set amount of money goes towards the principal, the interest, and other items. For example, if the payment is $1000, we could say that $150 goes to the other items; $200 to the interest; and the remainder towards the principal. In reality, the amount going to the principal and the interest is always changing. When you fist obtain your loan, you could be $650 towards the interest, and only $200 towards the principal. Yes, ladies and gentleman, the bank collects interest on the loan first. Surprised?
If you pay what ever you can afford towards the principal, you reduce that amount. Reducing that amount means you pay less interest. Paying less interest means you pay off the loan faster. As a reminder, the lender may have a penalty in place if you pay off the loan early. There should be no rule against you paying towards the principal each month. It really is simple math, and it is a bit like making compound interest work for you. You know that reinvesting the earnings from your stocks and savings helps you over the long run. By paying down the principal, you get a similar effect over the long run. That is the big secret, which is no secret at all.You end up paying less money on your mortgage, because you pay less on the interest.
Ido not think that most mortgage companies are out to get you. They are businesses who work off a certain model. The majority or borrowers never intend to pay off their mortgages early, so the lender makes the money coming to them anyway, available to them earlier.Find a mortgage broker or lender who explains the process to you, and you will find that you can work within those boundaries.