One of the most common home loans is a 30-year fixed rate mortgage. If the thought of it taking 30 years to pay off your mortgage seems frightening, here are some easy ways to shorten that term and also end up saving you thousands of dollars over the life of your loan.
Any additional payments to the principal amount, the original sum of money borrowed in a loan, helps to lower the amount of interest that you will pay over the lie of your loan and can also help to shave years off the loan as well.
When you make extra payments toward your loan, the key is to let your lender know that you want the extra funds to go toward your principal balance as they will not necessarily do this for you automatically. I recommend that you contact your lender to see what you need to do if you want to make an extra payment either by check or online. Some lenders may require a note on your check or have you submit 2 checks.
The good news is you don't have to double your mortgage payment to make a big difference. If you have a 30 year mortgage on a median-priced home in our area of $250,000 with a 5% interest rate, you will have a mortgage payment of $1,342.05 for the monthly principal and interest payment. Over the course of the loan, if you pay just your monthly mortgage payment , you will have paid $244,133.89 in interest!
To help save on the amount of interest you pay over the life of the loan, here are three options you may want to consider:
First, pay an additional 1/12th of your mortgage payment every month. In the example above, adding $111.84 to your monthly mortgage payment might not seem like a lot, but each year you will have paid one extra month's of payments which will shorten the term of your loan by 4 years and 8 months while saving you $42,000 in interest.
Second, pay an additional $50 per month towards your mortgage. That might not seem like enough to make a big difference but that extra $50 will save you over $21,000 in interest and will take over 2 years of the end of your loan.
And third, make a one-time lump sum payments whenever you can. If whenever you find yourself with a little extra money, paying that money towards the principle can save you thousands of extra dollars on interest and shave off time on the length of the loan.
Now, before you apply any extra money towards your principal, I recommend that you first pay of higher interest rate loans such as credit cards, car loans, etc. You also need to evaluate if there will be an advantage to paying off additional principal if you intend to stay in a home less than about 11 years.
If you are wondering what options would make sense for you to save thousands of dollars in interest and shorten the term of your loan, feel free to reach out to me.