Saving Thousands In Mortgage Interest
How does saving thousands of dollars in mortgage interest sound to you? The 30-year fixed rate mortgage is the most common loan used to buy a house. Now that you have the loan lets review easy ways to shorten the term and shave off mortgage interest $$ you pay over the life of the loan.
The big picture
Additional payments to the principal amount (the original sum of money borrowed in the loan) will reduce the loan balance amount the interest is calculated against each month. This makes an impact as soon as you do it. Your monthly required payment won’t change, but the number of payments you need to make will be reduced by months and potentially years as you continue to do this. When you add up all the interest paid, it will be thousands and thousands less than paying on the original loan schedule.
The ONE important detail to always remember. Make sure you let your lender know you want the extra funds to go toward your principal balance. Some lenders will do it by default, but it’s not automatic, and it’s simple to do. Use the note field on your check or online bill pay to notify your lender.
Here’s an example
Let’s use this example of a median-priced home ($250,000) in Southwest Florida. The monthly principal and interest payment would be $1342.05 based on a 30-year mortgage at 5% interest. The rates have just gone down considerably for new loans, but rates have been between 3.5% to 4.5% in the past year or so. I’m using easy numbers to explain the concept. The interest over the course of the loan calculates to $233,133.89 in total. Sure making a double mortgage payment here and there will make a big difference, but let’s dive into more realistic, easy to do tips that you’re more likely to follow through with.
at 5% interest. The rates have just gone down considerably for new loans, but rates have been between 3.5% to 4.5% in the past year or so. I’m using easy numbers to explain the concept. The interest over the course of the loan calculates to $233,133.89 in total. Sure making a double mortgage payment here and there will make a big difference, but let’s dive into more realistic, easy to do tips that you’re more likely to follow through with.
Here are 3 easy ways to trim off that mortgage interest
1. Split it up evenly.
What if you were to take your mortgage payment from the example above($1342.05), and divide by 12 ($111.84). Adding the $111.84 each month to your payment is similar to making an extra mortgage payment each year. It’ll have a greater impact than waiting until the end of the year and making a double mortgage payment. That small amount each month will reduce the principal that the interest is calculated on. This method will shorten the term of your loan by 4 years and 8 months, all while saving you $42,000 in interest!
2. Simple, but calculated impact
Add an extra $50 to each mortgage payment. While that may not seem like enough to make a difference on the term of your loan, it will shave off 2-years and $21,000 in interest paid. That’s still a hefty amount. I’ll take an extra $21,000!
3. One-time lump sum payments
This one I can’t calculate until I know how much and when you’re making the payment, in relation to the remainder of your loan, to be able to tell you how much of an impact it will have. It can and will have an impact though!
This method is the better option if you have higher interest debts, like credit cards. Your overall financial well-being would benefit from using any extra funds you have to pay those debts down first, before applying the extra money towards your mortgage. Then, when you find yourself with a little extra money from a yearly bonus, a tax return, or investment dividends, apply it towards the principal.
Can you commit to a certain amount at least each year when your tax return comes in? We can run a scenario based on that to see how much that will help.
The Bottom Line
I wish they taught me this in school. Maybe I missed that day. If someone spelled out how I could save enough money to pay for a new car or add to my retirement, I’m sure I would have bought my first house sooner. If you’re wondering what strategies would work best for you to shorten the term of your loan, consult a local real estate professional who can answer your questions or connect you with someone who can.
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