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Term Reduction Alternatives

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The biweekly plan is actually just another way of saving money by reducing the loan’s term. In addition to the
biweekly plan, consider these three additional options:
● Extra principal payments
● Refinance to a shorter term
● Graduated payment plan
Extra principal payment plan
As mentioned above, the extra principal payment program pays a little extra toward the principal balance of the loan, over and above the regular monthly requirements. By paying a little extra each month or once in a while, the borrower can dramatically lower the term of the loan.
For example, a 30-year $100,000 loan with an interest rate of 7.75% has a monthly payment of $716.41. If the borrowers were to make a monthly payment of $816.41 (an extra $100 toward principal), the loan would be paid off in about 24 years, for a total savings of about $50,000.
Refinance to a shorter term
If you can afford the commitment to a slightly higher monthly payment, refinance your 30-year mortgage into a 10-year, 15-year or 20-year mortgage loan.
The monthly payments will be higher because of the shorter amortization; however the interest rate is lower and the overall interest charges are dramatically less.
Graduated payment plan
Sometimes referred to as the graduated equity mortgage or growing equity mortgage, the graduated payment plan also shortens the loan’s term and reduces total interest cost. Although many variations exist, the basic pattern is to increase the payment amount at the beginning of each year. The extra payment earn interest income and is then applied toward repayment of the loan principal.