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Advance Payments to Principal Can Save Thousands in Interest

Many homebuyers obtain 30-year fixed rate mortgage loans in excess of $100,000 and agree to pay lenders over $200,000 in interest, yet many do not understand how to eliminate about 2/3 of this interest by making advance payments to principal.

The average homebuyer who borrows $100,000 at 10% interest over 30 years doesn't realize that he must agree to pay back some $316,000. This is the $100,000 principal plus $216,000 interest on the loan; over twice the amount of interest as the principal amount. Those who do realize they are paying this huge amount of interest justify doing so by saying "It is tax deductible!" This is true, it is tax deductible, however the maximum tax bracket is 31% as of January 1, 1991. Consequently only 31% of the $216,000 of interest can be deducted if the buyer is in the top tax bracket. So. Some $149,040 of the interest is not tax deductible.

One way to eliminate up to 2/3 of the interest a buyer would pay is to obtain a 15-year mortgage instead of a 30-year mortgage. This would decrease the interest paid by $122,600. But the drawbacks with a 15-year term are 15-20% higher monthly payments and lower loan qualifications. Therefore, most buyers would choose a 30-year mortgage. But, what if you could show the buyer how they could have the best of the 30-year mortgage and a 15-year mortgage at the same time? That is, low payments and qualifications on a 30-year mortgage but eliminate 2/3 of the interest and build equity faster with a 15-year mortgage. I'll bet they would be interested in such a "super mortgage" wouldn't they?

You can show buyer how to have the best of both mortgages by teaching them how to read and use an amortization schedule! The first step is to obtain an amortization schedule for the buyer's purposed loan amount and interest rate and mortgage term. (Most real estate offices now have computers that can print amortization schedules and most lenders provide one at loan closing.) Let?s use a $100,000 loan at 10% interest for 30 years as our example. The buyer?s payments would be $878.00 per month for principal and interest. Of that amount, interest would be $833.00 and principal $45.00.

The second step is to point out that a buyer could obtain a 30-year fixed rate mortgage to keep his payments as low as possible and insure that he could qualify for the maximum loan amount, but in order to build equity faster and save interest payments the buyer could agree to make some advance payments to principal. If you show him the second month's principal payment of $45.04 and tell him he could make the first month payment of $878.00 plus pay the second month principal amount of $45.04 in advance, he will wipe out one full monthly mortgage payment. This would save him a full monthly payment of $878.00 on an investment of $45.04. This would result in a 1900% return on his investment!

Now the loan balance is $99,909.96 so your second month?s regular payment is #3. If the buyer agreed to pay the second month's payment for the principal and interest of $878.00 plus pay the fourth month's principal amount of $45.80 in advance, he would eliminate another monthly payment resulting in another 1900% return in investment. If he voluntarily continued to pay an extra month's principal amount in advance for 15 years in a row, the mortgage would be retired in 15 years instead of 30 years! This would also help him build equity faster and he could qualify for the lower payments on the 30-year fixed rate mortgage. Another advantage of this method of paying the mortgage is that the additional payments to principal are strictly voluntary on the buyer's part!


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