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Tuesday, September 19, 2017

Greetings Thrifty Friends,

The other day I was going over my bills doing a little math, a habit every thrifty-minded person should have! While looking at my mortgage statements I noticed that the amount of principal I pay out of my mortgage versus the amount that goes toward interest only goes up about 75 cents per month. 75 cents!

This is what is known as amortization.

Amortization means the majority of the payment at the beginning of a mortgage goes toward the interest, with only a slight amount going toward principal, or the amount originally borrowed. As your mortgage matures, that balance slowly tips more toward principal than interest. Since I am close to the beginning of my loan the amount that changes is miniscule.

But there is a way to increase my advantage, and that is I can pay additional principal without any penalty. How important is it to pay additional principal? Scroll down to find out.

Keep pinchin' those pennies,

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Paying one additional mortgage payment each year, whether in a lump sum or monthly increments, can lower a 30-year loan down to 24 years (depending on your interest rate and balance). If you pay more than one extra payment, the number of years will decrease even more. Since this additional payment will be applied only to the principal and not the interest, you end up saving thousands and thousands of dollars once the home is paid off!

And it also lowers the total amount of interest the borrower will pay, because it lowers the principal and length of time it will take to pay off the loan. So you save twice with each overpayment.