You’ve purchased a fine new home and now you have a fine new mortgage. Even though you would have been spending those dollars on rent had you not made the purchase, looking at 30 long years of payments can feel like a heavy burden.
The good news is, you can make that payment go away much faster.
You may have noticed that in the first years of your loan, far more of your payment goes to interest than to paying down the principal. You may also have noticed that over time, those numbers change. Every dollar you pay toward the principal is a dollar that is no longer accruing interest.
Say you take out a loan for $200,000 at 4.5% interest. Your monthly payment is $1,013. Of your first payment, $750 will go to interest and only $236 to principal. Each month the numbers shift by one dollar- with one dollar less going to interest and one dollar more going to pay down the loan. It will take approximately 17 years for the balance to shift – more to principal and less to interest.
However, you can change that balance in your favor, simply by paying a little more, especially in the early years of your loan.
You can make one extra payment per year
If you get an annual bonus or always get an income tax refund, use part of that money to make an extra payment on your loan. In the example above, you’d be knocking 4.29 months off the length of your loan – or one year for every 3 years that you make the additional payment.
You can add a little extra every month.
Adding just $50 or $100 each month will shrink the number of years on your loan – but what if you could add an extra $236 per month? You’d effectively be making 2 payments rather than one – and eliminating $750 in interest that you will never owe.
Create your own amortization schedule.
Decide how long you want to keep making those mortgage payments, then create an amortization schedule based on the interest you’re paying today. It’s like refinancing, but without the reduction in interest OR the fees and loan costs that you’d pay for a refinance.
You can find amortization scheduling programs on line, or simply give your lender a call.
You can refinance.
If you’re still paying a high interest rate, it could be in your best interest to refinance. This is especially true if you now have 20% equity in your home and can finance OUT of an FHA loan. As you are probably aware, FHA loans carry mortgage insurance for the life of the loan – eliminating that will give you extra money to pay down your loan.
We at Homewood Mortgage, the Mike Clover Group, will be glad to go over the numbers with you so you can see exactly how a refinance would affect you.
Should you try to pay your mortgage off early?
You should if your goal is to become debt-free and you can answer yes to these questions:
- Have I paid off my high-interest credit cards? (These should come first!)
- Do I have an emergency fund set aside?
- Have I got savings put aside for retirement and/or my children’s college expenses?
If you’re considering a refinance …
- Is my income stable enough to support higher payments?
- Is my credit score good enough to get me a low interest rate?
- Do I plan to stay in the house long enough to benefit from the lower interest rate?
Take care of your day-to-day obligations and nest eggs first. Then think about cutting years off your loan. Considering the amount of interest you’ll save, paying down that mortgage could be more beneficial to you than putting the money in a savings account – and more “sure” than putting it in the stock market.
It’s most beneficial if you plan to stay in the house until it’s paid off, but can also help you build equity that can go in your pocket should you decide to sell at some time in the future.
When you’d like to explore your options, call us at 800-223-7409.
We at the Mike Clover Group will be glad help you see how each of these scenarios will affect your finances. We’ll also be glad to get you pre-qualified so you’ll know what interest rate you’d pay for a refinance.