Month: September 2010

Homeowners are always looking for ways to pay off their mortgages early and, in the process, save money on interest.

Adding even small amounts of extra principal each month can add up to huge savings over time.

Although prepayment penalties are less common these days, and illegal in many states, if you have one in effect or think you do, check your loan documentation or consult with your mortgage professional before making any prepayments.

So what are your options?

The following numbers show the savings that can result:

A $100,000 loan, fixed for 30 years with a 5.5% interest rate, excluding property taxes, homeowners insurance and mortgage insurance, will have a monthly payment of $567.79.

If the loan were to be paid off in 30 years (360 months), you will have made payments totaling $204,404.40.

One Extra Payment per Year, Over 12 Months

Adding another $47.32 ($567.79 divided by 12) as principal to your payment each month will take roughly five years off of the end of the mortgage.

You would make 298 payments of $615.11 and one payment of $574.66, for a total investment of $183,877.34 – a savings of just over $20,500 compared to the 30-year counterpart.

One Extra Payment per Year, Once per Year

If you were to pay one full extra payment every 12th month, starting at the end of the first year, you will have paid $184,637.26 – a savings of just over $19,700 compared to the 30-year counterpart.

Pay It Off in 15 Years

Payments of $817.08 per month for 15 years will pay off the loan as well, the total expense being $147,074.40 – a staggering $57,330 less than the 30-year counterpart.

You may be wondering exactly what information your lender will ask for when you apply for a mortgage to either purchase or refinance a home. Following is a primer on some of the basics:

Income and Assets: Lenders are looking for 30 days of pay stubs, regardless of how often you get paid, plus the last two years of W-2 forms. Tax returns would be even better. If you’ve had more than one employer, be sure to get contact information for each, as lenders will need to verify your employment for the last two years.

Savings Proof: Proof of all checking, savings and retirement accounts will be needed. If you are scanning or faxing statements, be sure to include all pages of statements, even blank ones. Lenders are sticklers about seeing everything.

Residence History: First-time homebuyers, specifically those who have rented from landlords, will need to provide contact information for those landlords. If the landlord cannot be located, copies of canceled checks going back at least 12 months will likely be required.

Property Insurance Information: All lenders require that properties on which they lend money have property insurance. Make sure you have the name and phone number of the insurer you plan to use.

For Refinances: If you are refinancing, have a copy of the mortgage or mortgages that you have on the current property. Lenders need to be contacted both for payoff information and to verify that you are current on your payments with them.