The Principle of Principal: Paying Off Your Mortgage Faster

Wednesday, July 11 at 01:15 PM
Category: Personal Finance

You intuitively know that paying additional principal on your mortgage will help to pay it off more quickly and save money.  Most people follow one of three strategies for reducing mortgage debt more quickly:   Paying under a structured bi-weekly program, paying one extra payment each year, or paying extra principal monthly.  But which is the best plan to accomplish the quickest payoff? 

When you repay a mortgage loan, your payment consists of three components:   the original amount you borrowed (principal), the borrowing cost (interest), and escrow (annual tax and insurance on the property).  Your whole payment is referred to as PITI (Principal, Interest, Taxes and Insurance). The principal and interest (P&I) portion of your payment is truly servicing your debt, while the escrow part of your payment is simply a convenience whereby your lender is collecting 1/12th of your annual tax and insurance bill each month, holding it in escrow, then disbursing it in full  when the bills are due. 

Assume you just bought a house and borrowed $100,000 on a 30 year mortgage which has a fixed interest rate of 4.50%.  Your monthly P&I payment would be $506.69.  If you were to make these payments on time each month, it would take 30 years to pay off your loan. 

Here’s where I’m really going to motivate you to pay off the loan as soon as you can:  Making payments on that mortgage over 30 years means that you will end up paying back $182,404.57 on the original $100,000 loan.  Yes, that’s $82,404.57 in interest.  Yikes!

Now that I’ve got your attention, let’s look at three options for paying off your mortgage more quickly, using the scenario above.

Bi-Weekly Payment Programs

The concept of the bi-weekly payment works like this:  you take your regularly scheduled P&I payment ($506.69), but pay ½ of it ($253.34) every two weeks.  Because there are 52 weeks in a year, it has the effect of you paying ½ of your payment 26 times per year, which equals 13 whole payments.  So you’re actually paying an extra payment of $506 each year. 

Results:  You will cut 4 years and 5 months off the term, and pay a total of $68,472.87 in interest.  This is an interest savings of $13,933.85 as compared to the original loan. 

Paying One Extra Payment Each Year

So you like the idea of making the equivalent of an extra payment each year, but maybe the timing of a bi-weekly commitment makes you nervous.   What if you just saved a little extra on your own, then made an extra whole payment of $506 at the end of each year? 

Results:  Paying this way has virtually the same result as the structured bi-weekly.  You will cut 4 years and 6 months off the term, and pay a total of $68,119.32 in interest; a savings of $14,287.39 over the original terms. 

Paying Extra Principal Monthly

Ok, so you don’t want to pay a fee to your lender to set up bi-weekly payments and you don’t have the discipline to set aside (and not TOUCH) your saved money to pay an additional payment at the end of each year, but you DO want to kill this debt in about 25 ½  years.  What else can you do?  Check it out:  Pay $549 each month instead of the basic $506.69.

Results:  Paying the additional $42.31 as a PRINCIPAL REDUCTION each month will have your original 30 year mortgage paid off at the same time as the scenarios above.

These are three easy ways to save a lot of money on interest and pay your mortgage off faster.  All have almost the same effect as to how much you save in interest and time.  If one of these options appeals to you, contact an Arvest lender to learn more about the option you think best fits you.  If paying extra principal appeals to you, consider crunching the numbers a little more with one of our calculators on

Every financial situation varies. Please consult your Arvest lender for specific advice.

This article was written by Barbara Crump, Vice President and Private Banking Officer at Arvest Bank in Joplin, MO.  She may be contacted at

Tags: Financial Education, Home Loans, Lending and Financing, Mortgage, Savings
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