A 15 or 30 year mortgage is a long time to be paying on the same bill. Even with interest rates at historic lows, a 30 year mortgage will charge you almost 100% of the home’s cost in interest over the life of the loan. For example, a $175,000 mortgage at 4% for 30 years will cost $125,772 in interest. The total interest comes to 41% of your total payments to the mortgage company and almost 72% of the cost of the home itself!. It’s like buying your house for a 41% premium to the cash price.
But you don’t have to stick to the 30-year term exactly. There are several ways you can pay off your home mortgage faster, and as a result save thousands of dollars.
Note: You might want to consider carefully whether you want to use your mortgage as a hedge against inflation, or pay it off early.
Here are four different ways you can save on mortgage interest and pay off your home loan faster than the original term.
The easiest way is simply add extra principal to each payment you send in to your mortgage company. Every little bit counts as you reduce the amount of principal, the interest charged on the remaining principal will be lower.
You can add extra principal in two different ways:
Refinancing your mortgage from a longer term like 30 years to a shorter term like 15 years can save you significant amounts of money. Your monthly payment will increase as well; it’s like you’re adding a bunch of extra principal to each payment.
One bonus of refinancing to a shorter-term mortgage is you will almost always get a lower interest rate as well. A 30-year mortgage might cost 4% and a 15-year mortgage only 3% or 3.25%.
One relatively painless way to pay extra on your mortgage is to pay every 50% of your mortgage payment every two weeks rather than 100% of your mortgage payment every month. In most months this won’t be any different than paying your mortgage off with normal payments, but there is a subtle difference. If you pay once per month you’ll pay 12 individual payments. If you paid twice per month that would be doubling the number of payments from 12 to 24. But if you pay 50% every two weeks (rather than twice per month), you will end up with 26 payments throughout the year rather than 24 payments. This is because there are 52 weeks in a year, not 48 (12 months x 4 weeks in a month). Those two extra 50% payments will result in you adding 1 additional payment each year.
Another twist of refinancing your home to a lower rate is that if you can afford to, you can just keep paying your original mortgage payment. This works only if the mortgage terms are the same length (or if you were paying significant amounts of extra principal to a longer term mortgage and refinance to a shorter term).
For example, let’s say you’re paying $1,200 per month on your mortgage. You are able to refinance your home and drop your interest rate so much that your mortgage payment drops to $1,066. That alone would save you a ton of interest, but if you keep paying your original $1,200 payment in your budget then you’ll save even more.
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