The most common loan used to buy a home is a 30-year fixed rate mortgage which may be conventional, VA, or FHA. Making that payment over the course of 30-years may seem daunting, but there are easy ways to shorten that term and save thousands on your mortgage.
Additional payments to the principal, the original loan amount, will cut down the amount of interest you will pay over the life of your loan. This can also cut down years on the time it takes to pay off the entire loan, as long as you don’t refinance.
When you pay extra toward your loan principle, you must let your lender/bank know that you want the extra funds to go toward your principal balance. They will not automatically do this for you.
Just a little additional payment towards your principle can make a big difference!
If you have a 30-year mortgage of $500,000 with a 5% interest rate, you’ll be responsible for a $2,684.11 monthly principal and interest payment. Over 30 years, if you pay your exact monthly payment, you will have paid $466,267.78 in interest alone!
Paying a Little Extra Can Pay Off Big
1. Pay 1/12th extra every month
Savings: In the example above, adding $223.68 to your payment may not seem like much, however, every year you will pay one extra month’s payments. This alone will shorten your loan by 4 years and 8 months, and save you $84,000 in interest!
2. Pay $100 more per month
Savings: This may not seem like much, but that small amount will save you over $41,000 in interest and take off over 2 years of your loan. This may not seem exciting but in 28 years, you’ll be happy to pay off your loan sooner!
3. Pay one-time lump payments when you can
Benefit: If you have a little extra money, maybe from a tax return, annual bonus, or investment dividend, paying that money towards the principal can cut interest costs. The precise savings depends on the amount you pay and the time remaining on the loan. However ther will be a savings.
Please keep in mind if you have higher interest loans like credit cards, consider using any extra funds you have to pay those first. Also, if you do not plan on staying in your home long, let’s say less than 10 years, paying extra might not make sense.
Just because you have a 30 year mortgage, doesn’t mean you have to take that long to pay it off. There are other pros and cons to paying it off early, and may require hiring a Certified Financial Planner to consult on your whole financial standing. Check out my business partners for recommended service providers– Meet the Team
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