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As we talked in the earlier article you own more of a property as more payments are made during the time you are paying off the loan. In other words you don’t own the house if you have a mortgage, it is the bank property until you pay it off. Since for most people their home is one of their largest assets and biggest debt until it is paid off it is in their best interest to pay it off early and stop sending their money to the bank and stop working for the bank as soon as possible.
Let’s look at another example and run some numbers to see what is involved. The chart here shows the total amount of money you would have shelled out if the loan was paid off during a given year.
For example, if the loan was paid off in 15 years your total money out would be about $218,000; $159,000 in interest and $59,000 toward the $200,000 principal.
The numbers get more interesting as you reach the end of the loan. If you held the loan to its end you would have almost paid a little over twice as much as the money borrowed.
Of course we are ignoring the tax deductibility of the interest amount here but you get the idea. A lot of money is send to the bank!
Hopefully at this point you agree that you want to pay the bank as little as possible and pocket that extra cash for yourself.
How can you pay the bank less?
The good thing about conventional loans is that the lenders allow you to pay them off early. Unlike some other types of loan where you are obligated to pay the entire interest regardless of early pay off. It turns out that if you paid one extra payment each year you could pay off the loan about 7 years faster! We will cover this in another article.
Rule of Thumb
Extra payments can save a bundle in interest payments to the lender
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