Extra Payments Provide Huge Savings
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Paying regular additional payments on your principal balance can yield significant savings. Borrowers employ various techniques to accomplish this goal. For many people,Perhaps the easiest way to keep track is to make one additional mortgage payment a year. If you can't afford to pay an additional whole payment in one month, you can split that large amount into 12 smaller payments and write a check for that additional amount monthly. Another very popular option is to pay half of your payment every two weeks. The effect here is that you make one extra monthly payment each year. These options differ slightly in reducing the final payback amount and reducing payback length, but each will significantly reduce the duration of your mortgage and lower the total interest paid over the duration of the loan.
Rounding up your monthly mortgage payment probably won't break your budget and it can shave months off the length of your loan and thousands of dollars in interest payments.
For example, Sandy is 40 years old and she just got a $200,000 30-year mortgage at a 4.5% annual interest rate with APR 4.571%. Her monthly payment is $1,013.37, but if she rounds that payment up to $1,100, then she will pay off her mortgage in 25.4 years, or at age 65. Importantly, rounding up allows Sandy to lower the total amount of interest she will pay on her loan by $28,377 -- savings that will go a long way toward living the type of retirement she's planning.
Additional One-time payment
It may not be possible for you to pay extra every month or even every year. But you should remember that most mortgage contracts will allow additional payments at any time. Any time you come into unexpected money, consider using this provision to make an additional one-time payment on mortgage principal.
If, for example, you receive a large gift or tax refund just a few years into your mortgage, paying a few thousand dollars into your home's principal will significantly shorten the repayment duration of your loan and save a huge amount on interest over the life of the mortgage loan. Unless the mortgage loan is very large, even small amounts applied early in the loan period can yield huge benefits over the life of the loan.
15, not 30
The previous strategies cut enough years off a loan that someone in their early- to mid-40s can be mortgage-free when they're in their 60s, but if you're in your mid- to late 40s and still want to retire mortgage-free, a better bet could be to refinance your 30-year mortgage into a 15-year loan. In addition to taking the guesswork out of making accelerated payments, 15-year loans offer lower annual interest rates than 30-year loans, which can translate into big savings in terms of interest.
At Pacific Coast Financial, LLC, we answer questions about money-saving strategies almost every day. Give us a call at 206.393.0684.