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One Quick Trick that Can Shave 25% Off a Loan

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One Quick Trick that Can Shave 25% Off a Loan

One Quick Trick that Can Shave 25% Off a Loan

Right off the bat, let’s get this out of the way — there are no magic wands or legal loopholes that are going to lob seven years off your 30-year mortgage. Shaving off a significant portion of your loan has to be done with a little extra effort and investment on your part. But how little of an effort is what tends to shock most borrowers.

This is a simple formula that can be applied to nearly any loan or credit situation. A mortgage, vehicle loan, student loan, credit card — barring any special stipulations, it works for all of them.

What You Need to Do

The ultimate goal is to make the equivalent of one extra payment per year. If you’re current with the loan in question, this entire extra payment can be applied directly to the principal balance, circumventing interest. This is significant because during the early stages of a long-term loan — particularly a mortgage — upwards of 90% of your payment is going to interest and escrow. During those first few years of a 30-year loan, often less than 10% of your payment is applied to the actual amount you borrowed. Shocking, right?

Let’s be realistic. Not many people will be able to simply make a double mortgage payment one month out of the year. The trick is to spread it out over 12 months.

Here’s the formula: Take your normal monthly payment and divide it by 12 (number of months in the year). Now, take that number and add it to your monthly payment. That’s it!

For the sake of nice round monthly payments, let’s look at an example using a 30-year mortgage loan of $107,000 at 5% APR. The monthly payments in this case would be approximately $900 per month:

  • $900 ÷ 12 months = $75
  • $75 + $900 = new monthly payment of $975

In this instance, we just add $75 per month to our payment. It’s a little extra, sure, but if you’re not spread too thin, here’s why this is a big deal in the long run:

  • $900/month = 30 years of payments
  • $975/month = 23 years of payments

That’s right, by paying $975 each month instead of $900, we’re able to cut seven years of payments. This same principle can be applied to most credit cards, vehicle loans or other long-term borrowing. As in many financial situations, a small investment in the short-term can pay for itself many times over in the long run.

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