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We’ve all seen amortization tables, right? It’s quite sad really. Let’s take a $200,000 P&I mortgage with a 7% interest rate. The payments for this loan would be approximately $1300 per month. In the first year, you will have paid about $15,600 in mortgage payments. Out of this, less than $2000 will go towards your principal. The total interest paid after 30 years will be $279,018 over the life of the loan. Now hopefully your home will appreciate at least by that much over 30 years. However, we’ve all been told that the sooner you can pay off your mortgage, the better. What we save in taxes from the interest deductions on our tax returns doesn’t come close to what we’ll end up spending on the interest payments!

So how do we pay off our mortgages faster? We’ve all heard about the typical ways to pay down our mortgage faster and save thousands of dollars in interest payments. For example:

1. Pay bi-weekly. This adds up to one extra monthly payment per year. Paying one additional mortgage payment each year, whether in a lump sum or monthly increments can lower a $200,000 mortgage at 7% interest from a 30-year loan down to 23 years, saving you a total of about $65,000 in interest.
2. Making even an extra $100 - $200 a month extra payment directly towards the principal will also help tremendously.

But what if you just do not have the extra money to put towards your mortgage loan? What then? Well, there is another way. This way does not require you to make any extra mortgage payments; however, it does require you to be extremely disciplined. If not, you could end up owing much much more in the long run.

Here is how it works. Suppose your monthly P&I payments are $1300 a month. What you would need to do is to refinance to an interest only loan. Your new payments would probably be around $900 – $1000 per month. Now this is the important part. You would still make your budgeted mortgage payments of $1300 each month, but now you have about $300 going directly towards the principal. At the end of the first year, you will have paid more than $3600 towards your principal instead of the $2000. Each month, your required interest only payments will be lower because it will be calculated with a lower principal amount. So as less and less is required to make the interest only payments, the difference between the interest only amount required and the $1300 that you are paying, will become larger and larger. The difference will continue to be put directly toward the principal. Again, the result is that every month the amount that gets put towards your principal mortgage amount will become larger and larger.

Again, I caution you to not change your payment habits. Do not think that because the required monthly payments are now only a $1000, that it’s OK to not make your $1300 payment. It’s easy to think, “I’ll just skip the extra payment for the next two months because I really want to go on vacation this year, or because I really want to by that new television set.” If you do that, then it will become very easy to do it again. As I stated above, if this happens, then this plan will not work and you will end up owing much more on your mortgage in the long run.

For those who would prefer to keep their P&I loans, check out www.arcloans.com. This is a mortgage company that wants to keep your business for the long run. Rather than have you refinance with another mortgage company with lower rates, ArcLoans has interest rates that will only go down and never up with automatic refinancing with no closing cost.