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# Is it possible to convert 40 year loan to 30 year

Posted on: 31st Aug, 2006 11:50 pm
Hi, is it possible that I change a 40 year mortgage into 30 year by offsetting the interest charge in 40 year and paying more in principal?
Hi,

Welcome to our forums.

You can offset the interest in 40 year mortgage by paying extra towards the principal while you make the monthly payments.

In the early years of your home loan, a greater part of the monthly payment goes towards the interest. As years pass by, the principal balance is lowered, so less money goes towards the interest and more goes towards paying down the principal.

There are two ways of paying extra towards the principal. You can make additional principal payment with each monthly installment or pay a single lump sum amount. In this way, you can reduce the loan term and pay off the loan in 30 years instead of 40 years.

Thanks,

Caron.
Posted on: 01st Sep, 2006 12:02 am
Peter, be sure to check out if there is any prepayment penalty if you pay extra towards the principal. The lender may ask for it, as extra payments will make him lose the interest he could have otherwise received had the loan been paid off in 40 years.
Posted on: 01st Sep, 2006 12:09 am
Hi Peter,

You should keep a record of the additional payments to make sure that the lender is crediting them to lower the outstanding loan balance.

Thanks.
Posted on: 01st Sep, 2006 12:42 am
Hi,

Let me help you with the calculations on 'Conversion of 40 year to 30 year loan'.

Let's assume that you have taken a 40 year fixed rate mortgage loan of \$300000 at 6% rate of interest.

Principal: \$ 300000
Interest Rate: 6%
Loan term: 40 years = 480 months

Using our FRM calculator, the monthly payment will be = \$ 1650.64
The total interest for the entire loan term = (\$ 1650.54 * 480) – (\$ 300000) = \$ 492259.20

For 30 year loan;

Principal: \$ 300000
Interest Rate: 6%
Loan term: 30 years = 360 months

The monthly payment = \$ 1798.65
Total interest for the entire loan term = (1798.65 * 360) – (300000) = \$ 647514

To convert into 30 year loan, monthly payments are to be increased by = (\$ 1798.65 - \$ 1650.64) = \$ 148.01

So, you can pay \$148.01 as extra payment towards the principal to convert your 40 year loan into 30 year.

The total interest you save due to this conversion = = (\$ 647514 - \$ 492259.20) = \$ 155254.80

Hope this is clear to you now.

Thanks.
Posted on: 01st Sep, 2006 02:24 am