If you’re like two-thirds of American homeowners, you got a mortgage loan to finance the purchase of your home. For many, it’s a 30-year commitment. Wouldn’t you love to reduce that to 20 years – or even 15 years?
If there’s any extra money in your budget, there are some simple ways to do just that.
First, remember that every dollar you pay on the principal reduces the amount of interest you pay. That’s why with each payment you make, the amount going to pay down the principal rises slightly while the amount paid in interest decreases slightly. In the early years of a mortgage loan, twice as much will go to interest as to principal. That means making extra payments in the early years will greatly reduce both the interest you pay and the number of years you pay.
Pay a little more now to pay far less later
- Make one extra payment per quarter to pay off your loan in 19 years.
- Make 1/12 of an extra payment per month or pay bi-weekly rather than monthly to add one extra payment per year, and shave four years off your mortgage.
- Look at your statement and see how much of your last payment went to pay down the principal. Can you add that amount to your monthly payment? If so, you’ll effectively be making two payments per month.
- Round up each payment so you’re paying even a few dollars extra per month – it all adds up.
- Make an extra payment or increase your payment any time you get a raise or a bonus.
- Pretend you’ve refinanced. If you’ve got a low interest rate on a 30-year mortgage, ask your mortgage lender to calculate the payment as if you had a 15-year mortgage. Then pay that amount each month.
If you have a $200,000 30-year mortgage at 4%, your principal and interest payments are $954.83. If you decided to pay it off in 15 years instead, the payment would be $1,479.38. If you have the discipline to do it, this is a better option than an actual refinance, because you won’t pay any loan fees – and if you have an emergency that cuts into your finances, you won’t be obligated to make the higher payment.
If you now have a 15-year mortgage, find out what you’d need to pay monthly to cut it down to 10 years.
One caution: Check with your mortgage company to make sure they will accept extra payments – and that they won’t impose a prepayment penalty. Make sure any extra funds you send will be applied to the current principal and not to the next month’s payment.
If your interest rate is a bit high, a refinance is a good idea.
But do check the facts and do the calculations. A refinance does come with loan fees, so if you plan to sell the house in the next 2 or 3 years, it may be of no benefit to you. Check with your lender to learn the costs, along with the new interest rate and payment.
Once you’ve refinanced, keep paying the same payment you’re making now. Depending upon the interest rates involved, it can cut years off your loan.
If you really, really don’t want to make house payments…
Consider downsizing. Sell your larger home and use the profits to buy a smaller, less expensive home. You may be able to pay all cash, or take out a small loan and pay it off quickly by continuing to make the payments you’ve been making on your more expensive home.
Whether you’d like to refinance or just want to know how a larger payment would affect the number of years you’ll be paying for your home, give us a call. We at Homewood Mortgage, the Mike Clover Group, will be happy to help.
Call us at 1-800-223-7409.
18170 Dallas Parkway
Dallas, TX 75287