Date: 2007-03-02 07:28 pm (UTC)
Basically, if you make an extra monthly payment, each year, that payment comes directly off the principal, with no interest.

This means the following year, you pay less in interest on each payment, and you pay off more of your principal. Put in an extra payment that year, and the interest amount drops further still.

Say you get a 30 year mortage. And say for the first twelve years, you put in an extra payment each year. So, you will have made 13 years of payments in 12 years. You will have reduced your mortgage by one year, and still have 17 years of payments left, right?

WRONG!!

You only have 3 more years, or so left. Your early payments reduced your principle so much, that that extra year of payments translated to years of interest. and effectively reduced your mortage term by 10 years.

Neat, huh?
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