First of all, with 30% down, you should be able to beat 5.6%! Get a second opinion.
This is an interesting question, so I did the work to give you a complete answer. Because of federal loan regulations, I must tell you that I do not originate loans, and this is not a solicitation for a loan. It is just an estimate for purposes of illustration of the principle.
$36,000 down (30%) on a home that sells for $120,000 will reduce your loan balance to $84,000. The Principal and Interest payment (P&I) @ 5.6% for 30 years on a conventional loan would be approximately $482.23. Add property tax (2.6% of value on the average) of $260/month and Insurance (estimated @ .7% of value) of $70 per month for a total of $812.23 per month (PITI). If you ADD $250 per month for principal reduction ($3,000 per year), your loan will be paid off in 13 years and 8 months. So, if you get a competitive loan rate, you can save a whole year of payments.
I am told that you should be able to get an interest rate in the 4.5% range, even lower if you are a Texas Veteran. At 4.5% and taking the $57 per month difference and applying that also to your loan, you reduce your payoff to 12 years and 6 months.
Since you are in 78240, and our office is at IH-10 at Huebner, feel free to drop buy and discuss your options. I'll be happy to help you find the best, most efficient way to accomplish your goals.
Doc Stephens, REALTORÂ®
Keller Williams Realty
1. $3,000 annually is $250 each month. If you paid an extra $250 each month towards the prinicpal balance of your mortgage, assuming a Beginning Balance of $91,000 (70% of $120,000), an amortization term of 30 years, a fixed interest rate of 5.60%, and no pre-payment penalty: You will pay off your loan in 172 months (14.33 years).
2. If instead you pay $3,000 towards your principal balance each December, and assuming all of the same variables as above: You will pay off your loan in 218 months (18.17 years).
The difference is that by paying monthly, you are reducing the principal balance each month which saves you interest on each of the remaining months of that year.
Please let me know if you have any other questions, I will be more than happy to assist you.
--Micah Harper, Attorney/Realtor
San Antonio, Texas
Best contact lender determine what works within your agreement pay off on your loan. they can provide you guidance... OR if not allowed place in a bank account with interest then pay off the home in one large lump sum.
Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
Look at getting a shorter term loan if you're wanting to pay off that mortgage quickly.
What I wanted to add was make sure you do the math before you start paying extra on that mortgage, while it seems smart it may not be wise. With an interest rate at say 4.5% that is pretty low. You would essentially be saving yourself 4.5 cents on the dollar for every dollar you add to the principal. Opt to pay off higher interes loans first such as credit cards, car loans etc that may have say a 17% interest rate you'll be saving yourself 17 cents in the dollar for every dollar you add to that loan.
And always look at investing that $250 a month into a ROTH or ROTH IRA or stocks which could yield you 10% or more on what you invest.
Adding extra principal payments made sense a few years ago when interest rates where higher in the 7% and 8% range it was a smart move with today's rates there are definitely smarter ways to invest your money than adding extra to your principal payments every month.
Do your research on this and remember it may sound smart but it may not be the wisest choice!
Here is a link to a site I recommend to my clients to do the same thing.
The interest rate sounds high considering the current market, check with at least 2 mortgage sources.