Dear Dr. Don,
I recently bought my first home. I financed $75,000 at 5.25 percent fixed for 30 years. The first payment is due Nov. 1, 2009. I have been told that making an extra principal-only payment each year on the anniversary date of the loan will reduce the life of the loan to around 18 or 19 years. Is this true?
-- Kathleen Calculates
Making additional principal payments on your mortgage shortens the life of the loan, but to shorten a 30-year loan down to 18 or 19 years would require an additional principal payment of about $1,400 to $1,500 per year.
You can use features on Bankrate's mortgage calculator to try different strategies to shorten the loan. I tried putting in $120 a month in additional principal payments. That shortened the loan by about 11.5 years and reduced total interest expense (pretax) from $74,095 to $41,568 -- a savings of $32,527. (However, the loss of the mortgage interest deduction on your taxes would reduce the interest savings.)
Making a smaller additional principal payment each month may result in slightly more savings compared to making a lump sum payment once a year. But the difference is close enough that you should take the approach you're more likely to stick with over time.
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