Reduce Your Mortgage
Most people are not aware that while they are paying down their mortgage, they will pay more in the form of interest than principal. One sure way to reduce total payments over the life of the mortgage is to reduce total interest paid. Indeed, those who refinance at a lower rate are trying to achieve just that; however, refinancing costs are comparable to closing costs in many cases, and are therefore a prohibitively expensive and impractical means by which to reduce your liability. A good alternative is to make additional payments to principal with each mortgage payment. As long as your particular mortgage agreement allows it, and most do, and you inform your creditor in advance of your intentions, even a 100 or 200 dollars extra per month will make an enormous difference. For example, in the table below, we've considered an individual who has taken a $300,000 mortgage at a fixed rate of 7% for 30 years. One readily observes that adding $100 per month can shave over 4 years and nearly $70,000 in payments, while adding $200 per month goes even farther, shaving over 7 years and over $100,000 in total interest expense. So, if you can, speak to your creditor about the possibility of making extra payments each month toward the principal of your loan.
Impact of Making Additional Principal Payments
30-year fixed Loan balance: Interest rate: Loan term (months): Monthly payment: Total payments: Total interest: Interest Savings $300,000 7.00% 360 $1,995.91 $718,527.6 $418,527.6 0 Mortgage payment plus $100 per month $300,000 7.00% 310 $2,095.91 $649,732.10 $349,732.10 $68, 795.50 Mortgage payment plus $200 per month $300,000 7.00% 275 $2,195.91 $603,875.25 $303,875.25 $114,652.35