Debt and Credit Help

by Tom Levine

Wanna know a little secret? There is an ingenious method
you can use, to pay off your 30 year fixed rate loan, in 23
years or less. It’s straightforward, simple, and easy to
understand. In this article, we’re going to explore this
little known secret, and we’ll provide several examples of
how it works, a few methods on how to implement, along with
some information on where to go and how to get started.

1. Accelerated Payments:

By accelerating the payment structure on your loan, the life
of the loan is reduced:

In a normal 30 year fixed rate loan situation, your monthly
payment is applied towards principle and interest. It is
amortized over the course of 30 years.

So any money above and beyond your normal payment is applied
solely towards the principle of the loan.

By reducing the principle of the loan, you are reducing the
total amount of interest that must be paid, and that equates
to an early loan payoff.

2. An Illustration:

You bake a cake (principle), and put it in the oven. Once
the cake is out of the oven, you’ll need to frost it with
icing (interest). Let’s say your cake is 12 inches in
diameter, and let’s say you need 3 jars of icing.

But you’re hungry, so you eat half the cake early. Now,
the cake is only 6 inches in diameter. Because of this, you
only need 1 jar of icing.

By reducing the cake (principle), you’ve reduced how much
icing (interest) you need.

Furthermore, it takes less time to frost 1 jar of icing.

So, by paying a little more in principle, you reduce the
interest owed. That reduces the life of the loan.

3. Methods:

Think of it this way: All you have to do is make 1 extra
monthly house payment a year. Do that and you reduce the
life of your fixed rate loan by about 7 years! You can be
as creative as you want to accomplish this, but here are 3
known methods:

Bi-Weekly Payments: Normally, you make your house payment
once a month, or 12 times a year. But with a Bi-Weekly
payment structure, you take your normal house payment, and
divide it by two. This is the amount paid every two weeks,
instead of once a month. By doing this, you basically make
1 extra (monthly) payment a year.

Double Payments: Double Payments simply means an extra
house payment. Once a year, you write out a check for twice
the amount. So, if your house payment is normally $1,000 a
month, then on December 1st, for example, you’d write out a
check for $2,000. This, in essence, accomplishes the same
thing that Bi-Weekly Payments accomplish. You make 1 extra
payment a year.

1/12 increase in payment: Increase your monthly mortgage
payment by 1/12, and you accomplish the same thing. Let’s
say your house payment is normally $1000. 1/12 of your
house payment is $83. So, you start making payments for
$1,083. Guess what? Your loan is paid off in about 23
years instead of 30.

Sidenote: A “Bi-Monthly” payment is not necessarily the
same thing as a Bi-Weekly payment. It may just mean that
you are paying ½ your monthly payment on the 15th and ½ is
paid on the 30th. The key is this: Are you paying a little
more each year, such as 1 extra house payment? If you are,
then early payoff is your ripe reward!

4. Here’s an Example:

Bob has a $300,000 loan at 7% interest, and his monthly
mortgage payment is currently $1995.91. Each year, Bob
pays $23,950.92.

Bob calls his lender, and his payment schedule is
restructured as a bi-weekly payment. Every two weeks, Bob
writes a check out for $997.96. Because of the two extra
payments this year, Bob will have paid $25,946.83. His loan
is reduced by about 7 years.

Or, on December 1st, Bob writes out a check for $3,991.82.
Because of this 1 extra payment, Bob will have paid
$25,946.83. His loan is reduced by about 7 years.

Or, Bob pulls out his calculator, and adds 1/12 to his
monthly payments, which equates to $166.33. Bob now writes
out a check each month for $2,162.24. At the end of the
year, Bob will have paid $25,946.83, and his loan is reduced
by about 7 years.

5. The Next Step:

How disciplined are you? Because, if you’re not disciplined
at all (like myself), then what are the chances of you
sticking with the program? Call your lender, and set up the
bi-weekly payment. This way, you are totally hands off and
it will all become automatic and habitual. You can always
change it back if times get rough, but at least there’s no
temptation to revert back to cheaper payment.

Or, do you have online bill-pay with automatic payments? If
so, go into your bank online, and add 1/12 to your monthly
payment.

Can you afford to accelerate your payments even further?
Adding 2 extra monthly payments a year, for example, reduces
your loan by about 10 years. Of course, now it might be
time to consider examining a new secret strategy, the 15
year fixed-rate loan!

We’ve enjoyed providing this information to you, and we wish
you the best of luck in your pursuits. Remember to always
seek out good advice from those you trust, and never turn
your back on your own common sense.

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Copyright 2004, by
LoanResources.Net
Tom Levine provides a solid, common sense approach to
solving problems and answering questions relating to
consumer loan products. His website seeks to provide free
online resources for the consumer, including rate-watch,
tips and articles, financial communication, news, and links
to products and services. You can check out Tom’s website
here:
http://loanresources.net , or you can email Tom at
info@loanresources.net .