Scrooge’s Top Secret Rapid Repayment Mortgage Plan

One of the biggest challenges homeowners face is paying off their mortgage. Many people realize that at the start of a mortgage they are paying mostly interest and the principal is really only paid down in the latter half of the mortgage. So if you have a 25-year mortgage much of the original mortgage value (called the principal) is still owing at the half way point (12 years). However there is a fairly painless way to pay off your mortgage in half the time and save tens of thousands of dollars in interest. Consider the following example.
Fred & Wilma have just taken out a mortgage for $100,000. The interest rate is 8% and the amortization term is 20 years.
♦ Payments are monthly and are $836.
♦ Principal portion is $170.
♦ Interest is $666.
Fred & Wilma are happy they will pay off their mortgage in 20 years and know that they can easily make the payments. They decide to go for a walk that evening and when doing so meet Scrooge, their neighbor. They tell him about their new mortgage.
Scrooge gasps in horror!
"What did we do wrong?" Wilma asks.
"Nothing that cannot be fixed." Scrooge replies. And then he invites them into his house for a cup of tea and a quick lesson on how they can save $50,000.
Scrooge shows them the numbers:
♦ Principal: $100,000
♦ Interest: 8%
♦ Amortization: 20 years
♦ Payment: $836 per month of which the first
payment is $666 interest and $170 principal
♦ Total interest over 20 yrs: $101,582
"Did you not say you could easily afford these payments?" Scrooge asks.
"Yes, of course. And we will even make some extra lump payments from time to time when we find the money and are not using it for other things" Fred answers.
"Harrumph!" Scrooge says. "You will probably never do that unless you have a plan. Right now your plan is to make some unspecified payment sometime and in some amount."
"And we do need to spend some money on a new living room set, our old set feels like stone." Says Wilma.
"Exactly my point…you will always find other things to spend money on" says Scrooge.
"Then what do you suggest?" Asks Fred?
"It is quite simple, and very effective. It will cut your amortization time in half (to 10 years) and save you $50,000 in interest, and it won’t affect your standard of living." Says Scrooge.
Fred and Wilma cling to his every word…
Scrooge continues, "All you have to do is Make an extra payment equal to the principal every month.
Fred & Wilma gasp in delight!
Scrooge shows them the new numbers:
♦ Principal: $100,000
♦ Interest: 8%
♦ Amortization: 20 years but mortgage gets paid off in 10 years
♦ Payment: $836 per month of which the first payment is $666 interest and $170 principal plus another $170 per month against principal
♦ Total interest over the term has been reduced from $101,582 to $51,712 a savings of almost $50,000
Some Things to Note
♦ As the interest portion reduces each month, the principal part increases and so does the extra payment.
♦ This means that Fred & Wilma will be paying $1006 in the first month and it will increase to $1212 in year 5 and $1668 by year 10.
♦ Because the payments increase slowly each year they are manageable increases and are often in line with wage increases.
This simple example shows how just a little extra paid each month on your mortgage goes a long way to saving you a lot of money and getting rid of your mortgage debt earlier.

Scrooge