Tip #5: Make a Pre-Payment Every Year

We have discussed two pre-payment methods in Tips 3 and 4. Now let’s see how making a slightly larger amount can dramatically save you money over the life of your mortgage.

We have already spoken about how an average consumer on a strict budget can make additional payments. Now let’s talk about those who are able to apply $1,000 or more towards the principle each year. We will demonstrate how an annual payment of $1,000 can also save you thousands over the life of the mortgage.

NOTE: The sooner you can make this pre-payment on each anniversary the more you will save…since this payment is credited to your principle the moment you make the payment.

So what are the savings when you make a $1,000 pre-payment?

Example
Based on a $100,000 mortgage at 6.00% interest for a 5-year term amortized over 25-years:
• Your monthly payment would be $639.81
• You would pay $28,225.07 in interest over the 5 years
• You would pay $10,163.50 in principle over the same 5 years
• Principle Balance left owing after 5 years $89,836.47

What You Will Save by Implementing a $1,000 Pre-Payment
If you paid $1,000.00 each year for 5 years you would save in the following ways:
1) You would save $647.23 in interest during the first 5 years
2) You would pay the principle down by $5,647.23 during the first 5 years
3) If you continued this process every year you would save 29 months worth of payments. At $639.81 per mortgage payment that means that you would save $18,554.49 over the life of the mortgage

Not bad for a simple $1,000 extra per year!