Early Loan Pay-Offs: Think of
the added interest you can save by paying more money, sooner
as opposed to later.
Does the idea of a 30-year loan make your head spin? Is it
difficult for you to conceive of making monthly mortgage payments
for 30 years into your future? But what if you’re not
sure that you can make the much higher monthly payments on
a 15-year loan? You could try a 20-year or a 25-year mortgage
– they are not common mortgages but many lenders will
offer them.
Still, what happens if you can’t make the higher payments
of the 20-year or the 25-year mortgage? Does that mean you
are stuck with a 30-year mortgage for the next…30 years?
Not necessarily. Most mortgage allow for an early pay-off
with no penalty. Even those that have a penalty for early
pay-off generally drop the penalty after just a few years.
What this means is that you can take out a 30-year loan, or
refinance a 30-year mortgage and yet pay that mortgage off
several years early if you choose.
One reason for doing it this way is if you are at all concerned
about committing to the higher payments of a 15-year loan
as compared to a 30-year loan. You may feel that you can make
the higher payments right now, but you want to have the option
to drop to lower payments at any time without penalty.
You can do that with most 30-year mortgages, although you
should discuss this with your loan officer to make certain
that there is no penalty involved.
Here’s how it works. Let’s assume that you have
a 30-year $150,000 mortgage at 6 percent. On a straight 30-year
mortgage your payment would be $899.30 every month for 360
months (30 years).
You feel comfortable with that monthly payment, but as long
as you have some extra money you’d like to pay an extra
$50 a month. By paying just $50 per month more than your regular
payment you will reduce your 30-year loan to approximately
a 26-year loan. If you paid an extra $100 per month (that
is, you paid $999.30 a month instead of $899.30), you would
shave almost seven years off of your loan payments.
Not only will your loan be paid off earlier, but you will
save many thousands of dollars in interest payments.
The advantage to taking out the longer-term loan and paying
extra every month is that if for some reason you are not able
to pay the extra payments for a while there is no penalty
to you.
Free early mortgage loan calculators are easy to find on
the Internet; check out how much time – and money –
you could save simply by adding a few dollars to your mortgage
payment every month. You may be surprised.
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