It’s well known among homeowners that 30 year mortgages gouge borrowers with excessive interest charges early in the life of the mortgage. Our very first $700 monthly payment, on our brand new home, was $260 in principle and $440 in interest. As you can see in the amortization schedule below, after making payments for about two years, the principle part of the payment is ONLY $271 and the interest part is $416.
If we chose NOT to make extra payments towards principal reduction, we would pay $150,000 in principal and $215,000 in interest on our 3.7% interest rate loan from our dearly beloved lender/bank!
The fact that millions of home buyers willingly do this is either ignorance of how much they are being ripped off OR a measure of how far they are willing to dig a financial hole to partake in the American Dream.
Our last payment was scheduled for February 1 2041 had we ONLY made our $685 monthly payment til that date in the distant future. NOW for the tip that home lenders do their best to keep secret.
We made a $700 payment(part of my wife’s bonus check) towards the principal(you have to tell them or it will go towards the bottomless interest pit). This single payment changed our last payment date from Feb 1 2041 to December 1 2040. YES, a single payment early in the life of your mortgage dramatically shortens the length of the most crippling piece of debt any of us will ever have!
A single principal reduction payment(over and above your regular monthly payment) equal to your monthly payment AND made quarterly will convert your 30 year mortgage into an approximately 18 year mortgage!! For us it also will knock close to $60,000 off of the interest we would have to pay if we only make minimum payment every month!!
Do NOT pay somebody to make two payments per month(each equal to half of your normal monthly payment) in order to reduce the length of your 30 year mortgage. Call your lender and demand that all additional payments they receive from you will deduct from outstanding principal balance. Some families doing this have changed 30 year mortgages to as low as 10 year mortgages.
Understand that the bank you dearly love, for lending you the money to get into your dream home, hopes you will never know to try this. When your loan originator notices the extra payments you are making, she will not enjoy that hot cup of coffee nearly as much. Save yourself a ton of money by making principal reduction payments as early in the life of your home mortgage as possible!