January 15th, 2014
It may seem a huge task – paying down your mortgage early. But you’d be surprised how small things can make a big difference and give you a great sense of security and freedom.
The first is one you’ve already heard. Instead of paying one payment a month, split the amount in half and pay twice a month. You may think you’re paying the same amount wouldn’t have any impact, but you’re paying down the principal faster thus making the interest accrue less quickly.
If you get a windfall or bonus, instead of spending the money, make a lump sum payment on your mortgage. If you got a holiday bonus, make an extra payment on your mortgage in January. It will go completely towards the non-interest portion of your loan and reduce the amount you owe for the rest of the year.
For example, a $500,000 mortgage with an interest rate of 4.53 percent (the rate as of January 2, 2014 as reported by Freddie Mac), would have a monthly payment of $2,542. By making an extra payment of the same amount at the beginning of the year, you will shorten the loan payoff from 30 years to 26 years.
While four years may not seem like a huge difference, that time translates into big savings. By paying off this home loan four years early, you would save $67,582 in interest.
If you have an adjustable rate, and the amount you’re supposed to pay every month goes down, keep paying the same amount. You’re used to paying it, and once again, the extra will go towards paying down the principal.
So why do I keep bringing up paying down the principle? Did you know that with a 30 year mortgage at 7%, that about 80% of all your mortgage payments during the first 5 years of the loan are interest? The sooner you start chipping away at the base amount, the less you’ll pay over the term of the loan.
So what are some other ideas?
Talk to a reputable loan officer about refinancing. As we mentioned in a prior post, there are refinancing options out there that will allow you to get a lower interest rate for the same term that you’re at. So if you’ve been paying for four years, you can refinance for 26 years rather then 30 again.
If your credit card offers you money back, use the money towards your mortgage.
And finally, always round up the payment each month. So if you were paying $2349, you could round it up to $2400 or even $2500.
What are some other small ways you could pay down your loan faster?