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How Does It Work |
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Good morning Edith, First time new home owners have a fixed 30 year mortgage, and have been paying additional $200 monthly on principal, what advantage do we get by doing this? I have heard it would reduce years on mortgage payment, if so how many years at this rate? |
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Without knowing the exact figures, I can’t give you an answer. In general, sending in the equivalent of one extra payment a year cuts a 30-year fixed-rate loan down to about 23 years. How does it work? Every time you send in an extra $200 (on a separate check, clearly marked "to be applied entirely to principal reduction") you save the interest on $200 from then on. You now owe a bit less interest than was scheduled for your next monthly payment, which frees up just a little more of it to reduce the debt, the principal. That’s how the loan gets paid off more quickly than originally planned. |
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Edith
Originally published on June 7, 2006 |
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