Mortgage Acceleration – How Do I Shorten My Mortgage?
Just a few days ago, someone asked, “How Can I Shorten The Years of My Mortgage?”
Indeed that is a good question, and I’ll try to explain. I won’t dive deep into all the details, but I’ll give you a quick response.
So Why Do Mortgages Last So Long In The First Place?
First, we need to address two areas: principal and interest, and how much is applied to each.
I’m sure you’re familiar with these, but let me re-establish something, so you know where I’m coming from: The most difficult problem we face in any loan is the principal balance-because the interest is charged on that balance.
Having said that, have you ever studied how your monthly payments are being allocated between principal and interest?
That is, what portion of your monthly payments go toward cutting down the principal, and how much goes toward the interest?
Though I don’t know your exact situation, I can wager that if you’re in the US, the overwhelming majority of each payment goes toward interest, NOT principal. Whether the interest rate is high or low, it’s the principal that causes the problem.
A few weeks ago, one of my friends was furious to learn that, of each payment she was making, only about $50 was going toward lowering the principal.
She was lucky, because she now has a chance to do something about it. Many Americans never realize how serious this is, because it robs us of our retirement. Banks front-load our loans, charging the majority of the interest at the beginning. The result is: we pay for our mortgages decades longer than we otherwise should.
You see, the fact that most of each of your payments go toward interest in the beginning, rather than principal, the bank is forcing you to make payments for a long, long time–much longer than you should.
Remember, we’ve established that the real problem is the principal, not the interest. Of course, interest is a factor, however, we must remember that the high principal is causing the higher interest allocation…
… and because the interest is calculated on the outstanding principal…
…so goes the seemingly endless cycle of unnecessary mortgage payments, because the principal doesn’t get reduced fast enough.
How To Shorten The Length Of Your Mortgage
So, regarding the question of how to shorten the number of years on your mortgage, a better question might be: “How do I apply more money toward lowering the principal?”
On thing’s for sure: your bank isn’t going to tell you any secrets, since their goal is maximize their profit on your loan.
It’s important that you find a way to make sure that a greater portion of your monthly payments apply toward your principal-not your interest. And there certainly are ways to do that!