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How to cut years off your home mortgage

Couple discussing mortgage needs

Whether you’ve just moved into your dream home and are experiencing the elation of making it your own or you are a few years into paying off your mortgage, if you are like most homebuyers, chances are you have the standard 30-year mortgage and may feel daunted as you anticipate decades of payments.

What if there were a simple way to cut years off that mortgage and potentially save yourself thousands of dollars in interest? By making just one extra payment a year to your mortgage or by spreading that one payment over 12 months, you can do just that, say experts.

“If you have a nest egg and are in a good place financially, put a little extra money to work to cut the mortgage term and add equity faster, suggests PNC Bank’s Staci Titsworth, a regional manager for mortgages.

Titsworth offers strategies to help make the extra payments easier to handle.

“A good rule of thumb is to take a tax refund or year-end bonus and apply it to the principal of your mortgage. It’s simple to do on a yearly basis, plus you are not parting with a large portion of your regular paycheck to fund that extra payment,” she says.

Another strategy is to add a little extra to each month’s mortgage payment and apply to the principal. That way it doesn’t hurt quite so much.

As an example, with $200,000 borrowed at a 4.5 percent fixed rate, making one extra payment of $1,013 annually can take 4.25 years off the loan and save more than $2,500 in interest. Double that extra payment and you could shorten the term by seven and a half years and save more than $9,600 in interest.

In the early years of a 30-year mortgage, the bulk of the payment goes toward interest and the interest is calculated on the outstanding principal balance, so every extra dollar that you can put toward that balance is going to take cost off the back end of the mortgage.

“We talk to our customers about their complete financial picture, from their loans to savings to retirement. We know that most people want to retire in a financially sound position, and typically their biggest debt is a mortgage,” says Titsworth.

“Consider meeting with a financial advisor who can take a look at your complete picture and calculate the benefits of paying off your mortgage faster while also managing your long-term goals.”

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