Paying off your Loan Early

There are several ways to pay off a loan early, whether it is your original first mortgage or even if you have just gotten a new loan to refinance your mortgage. Often people who have just refinanced a first mortgage are horrified to learn that the old loan that they only had fifteen years left to repay has been replaced by a new loan that they won’t repay for 30 years.

Paying off a loan early requires you to either be extremely determined and focused in making your payments or willing to use an outside service, which will cost you some of the money you are trying to save.

The trick to paying off a mortgage early is to make some form of extra payment each year that buys down the principal of your loan faster than it would be reduced if you had simply stuck to the published payment schedule.

Some people like the idea of bi-monthly payments as a way to pay off a loan early. With a bi-monthly payment you take your normal monthly loan payment, divide it in half, and make that half-monthly payment every 14 days. In order for this plan to be most effective it is necessary for you to make a half-payment every 14 days, and not twice a month. By making a payment every 14 days you will end up making the equivalent of thirteen monthly payments each year rather than the standard 12 payments.

This one extra payment each year can reduce the pay-off time of your loan by anywhere from six to even eight years and save you tens of thousands of dollars in interest payments over the life of the loan.

Many people pay an outside company to make the arrangements with the lender for bi-weekly payments and to actually make the payments for them. A simpler way to achieve the same results is to simply divide your monthly mortgage payment by 12 and then add that amount to your mortgage payment each month and specify that the additional payment is to be used to pay-down principal. As an example, let’s say your monthly mortgage payment is $900. Divide $900 by 12 and you get $75.

The trick, then, is to add $75 to your normal $900 mortgage payment every month and specify that the additional $75 is to be used for principal reduction. Do that every month, without fail, and you will knock at least six years off your mortgage and maybe even as many as eight years and you will save a bundle in interest payments.

Any amount that you can afford to pay extra on your loan each month, as long as it is specified to apply to the payment of principal, will reduce the length of your mortgage and save you thousands of dollars in interest payments over the life of your mortgage.