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  • Making payments over and above the minimum required on a standard mortgage can shave years off the length of the loan. The method of estimating the amount of interest saved by making these extra payments this is called reverse compounding.

    Definition

    Compound interest is paid on the principal balance on a mortgage plus the interest accrued on that balance. Reverse compounding is a way of calculating the amount of interest not charged to a loan when additional principal payments are made in advance.

    Reverse Compounding Is Flexible

    The number of years necessary to pay a mortgage off can be reduced dramatically by sending in extra money toward the principal balance. This method of early payoff provides more flexibility than refinancing, since the buyer can always go back to the standard agreed-upon payment if money becomes tight.

    Considerations

    Reverse compounding saves money on loan origination costs and other fees associated with refinancing, yet still achieves substantial savings over time. The method can be used to pay down a mortgage regardless of a person's credit score.

    Warning

    Reverse compounding prevents interest from being charged by reducing the principal. No money is actually generated by doing this. Be wary of experts who encourage buyers to use "reverse compounding" money to invest in another financial product.

    Benefits

    Conventional 30-year mortgages can be paid down faster without rewriting the loan. No special "reverse compounding" mortgage is necessary to pay a mortgage off early; just send in more money each month, and the bank will recalculate the payoff date.

    Source:

    What Everyone Should Know About Reverse Compounding On A Mortgage

    Amortization Schedules

    What Is Compound Interest?

    More Information:

    Is A New Mortgage Mess On The Way?

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