Paying Off Mortgage Early Doesn't Take Much

Most people would love to pay off their 30-year mortgages in 23, 21 or even 19 years. But most people don't realize how little it takes to do so.

Bank lenders say it takes only a little extra cash every month to take a big bite out of the mortgage over time. A few simple tricks - as simple as adding $50 to each monthly payment or making 13 mortgage payments a year rather than 12 - can pay off a house years in advance and save tens of thousands of dollars in interest payments on even a fairly modest house.

By increasing payments on a 30-year mortgage by as little as 5 percent, a homeowner can cut the length of the mortgage to as little as 23 years and a couple of months - 22 percent shorter than 30 years. Increasing the payments by about 10 percent can cut the mortgage to 19 years and nine months.

It's a financial version of the fable of the tortoise and the hare. A consumer doesn't need to come up with a $10,000 chunk to make a dent in the mortgage. Slow and steady brings the big win.

But bank executives say few people take advantage of the opportunity.

``There are some people who do it, but relatively few,'' said Ed Murn, president of Maryland National Mortgage Corp., a unit of MNC Financial Inc., the state's largest bank holding company. ``People live right up to their neck. This just isn't high on their list of monthly priorities.'' reason consumers can get a big bang for their prepayment buck is simple, said Tom Caudill, senior vice president of Maryland National Mortgage. Because a mortgage piles up interest on the unpaid balance, by paying an extra $50 each month the consumer not only gets the $50 out of the way, but that $50 doesn't accrue any interest in months to come.

``Every time you make an additional payment equal to the next principal payment, you cut one month off the life of your loan,'' Caudill said.

The keys are to start early and be consistent, said Linda Gannacone, senior vice president at Second National Federal Savings Bank in Annapolis, Md. And to make sure the extra money a consumer sends gets credited to principal only, she recommends enclosing a note with the payment that explains what the extra money is for.

Because the strategy costs you money early and pays off in the long run, she said, slow but steady prepayment works best with houses you plan to stay in rather than trade up.

It's important to start prepaying early because mortgages are front-loaded - that is, most of the interest the bank will charge over the life of the loan kicks in during the first few years. Payments in the last few years are mostly principal. So to cut the total interest bill on a house, consumers have to move while the interest is still piling up.

There are different ways to do it. Caudill says one good way to get ahead is to get an amortization table, figure out how much of the next mortgage payment represents principal, and add that amount to what's due. For example, if $90 of a $1,000 payment represents principal (the rest being taxes, insurance and interest), then send $1,090.

Gannacone said Second National often recommends making the equivalent of 13 mortgage payments a year. Perpetual Mortgage Co. urged one consumer recently to consider adding either $50 or $100 to monthly payments to shorten the term.

According to an analysis by Perpetual Mortgage, a consumer with a 30-year mortgage of $103,850 at 9.5 percent has a monthly principal and interest payment of about $870. By adding $50 to each month's payment, that loan pays off in 23.4 years. Add $75, and the mortgage pays off in 21.3 years. At an extra $100 a month - still only about 10 percent of the total mortgage payment - the loan pays off in 19.75 years.