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Pay Down Your Mortgage and Save

March 7, 2012

I was at a seminar the other day and of course everyone is always asking about real estate.  Casually, a non Realtor said something about not being able to refinance her mortgage.  She was going to be there a long time, over the five year normal term and was looking for ways to save money.  It was news to this consumer that she could pay down her mortgage sooner rather than refinance.  She could make a payment monthly or annually to bring principal down and therefore reduce total payments.  Generally, the equivalent of an extra $100 month could reduce the term of the mortgage by as much as 10 years and save considerable amounts of money.  Refinancing requires equity, good credit score and not cost effective unless interest is reduced by a point or more as paying closing costs on a refinance may not pay for themselves for about three to four years.

Do not make extra payments if you are going to move soon as the money goes against the principal.  Be sure and check or put on the line in coupon when making the payment that the extra amount is applied to principal; this amount cannot be gotten back once paid.  The sooner you start the sooner you will pay off the mortgage as principal is reduced over time as your monthly payment is a graduated schedule with early payments applied to interest payment first.  I did a quick check at www.bankrate.com and based on a $250000 loan, 30 years at 4.5% the survey says:

Interest paid         $206016              $140072                 $65944 savings      $1266.71  monthly payment

Breakeven Year         2026                    2018                         +8 years                $1516.71   monthly payment

If a 15 year loan is originally financed, the interest savings is $111770 but the monthly payment increases to $1912.48

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