There is a good reason why so many Americans select a 30-year pay-out term when they buy a home. It’s called cash flow. For most of us, handling a 15-year-term just does not fit our monthly budget. Besides, borrowing at a 30-term allows us to purchase a bigger, perhaps better, home. Yes, you can reduce the term of your loan, and yes, it can be painless. Use the “3% Rule.” Here’s how it works:
In the first year, make regular PITI (principal, interest, tax, insurance) payments. Beginning at year two, add three percent of the PI (principal & interest) to your regular payment. Tell the lender to apply this amount to the principal.
In year three, do the same thing, but calculate the next three percent to the already increased payment you made last year. Continue to do this for subsequent years. In approximately 15 years, the home will be paid in full.
The example below show you how:
Monthly P/I3%———–Additional———–Make this Payment
Year 1 $840.85——–— $00.00 —————-$840.85
Year 2 $840.85——– — $25.23 —————-$866.08
Year 3 $866.08 ———- $25.98———– —–$892.06
The above mortgage is a fixed-rate mortgage. The Monthly P/I increased due to the compound of the 3% Rule only.
If you have any questions, please consult your lender.
