Pay a little to save thousands on your mortgage

Owning a home is generally seen as an investment. When it comes to home mortgages, it is a well known fact that over the typical 30 year mortgage the average person will end up paying more than twice the amount of the original loan. This is because of the interest payments.

For example, and this is a rough estimate, with a:

  • $200,000 mortgage
  • 30-year loan
  • 7% interest rate

By the time the loan was paid off in year 30 the total amount that would have been paid into the loan would have been almost $480,000. That means an additional $280,000 was paid just in interest payments alone.

What can be done about this?

A home owner could always go for a shorter term mortgage such as a 15-year loan. The difference in interest paid in a 15-year loan vs. a 30 year loan is  nearly $150,000 saved. That is, if they can afford the higher payments.

If you don’t plan on owning a home for the full term then the situation changes as well.

What if you are already in a 30-year mortgage and are planning on outright owning the home? What else can you do? You can always pay extra every month! I know it’s not what a lot of you want to hear, but before you close this page, hear me out!

A good thing is that most lenders allow borrowers to prepay on the principle balance without any prepayment penalty.

Let’s look at that same $200,000 loan. Paying $100 extra each month will shorten the mortgage repayment time by 5 years and 9 months and save over $63,000 in the long term. Not so bad, if you really think about it.

Here is a handy tool you can use to get a rough estimate of how much you can save by paying extra each month.

Comments
6 Responses to “Pay a little to save thousands on your mortgage”
  1. Gian,

    Thank you for the informative article. Interests rates over the long haul can end up debilitating families and are truly a massive investment. In your example, the interest alone was more of an investment than the entire house!

    Unfortunately, with the housing economy having been hit hardest by the recent financial crisis, I am sure many families are even more upside-down in their homes than in the example you presented.

    In order to combat the excessive costs of a home loan, do you have any other advice as to how best minimize the interest rates paid on a home? Thanks!

    Steven

    • Gian Sorreta says:

      It really depends on the situation.

      If a person is already in a loan, they have fewer options. If they are upside-down they have even less. At that point a person will have to try to work out as much as they can with their bank/lender.

      There is also the option of rental income to supplement payments. Renting a room out can potentially bring in a few hundred dollars of profit each month, but at the expense of privacy and having to deal with tenants. Even for a short time if rental profits are paid directly into the mortgage principle it will significantly lower the overall interest payments.

      Refinancing can give you a lower interest rate and payments, but it also does reset the term to 30 years. There also may be refinancing fees. Whether you actually do save money or pay more in the long run will have to be calculated on an individual basis.

      Before buying a home a person can opt for a shorter loan term, or even buy down points if the lender gives the option. For example, a lender may charge 1% of the mortgage amount per point of interest lowered. In the long run this will save money, but if a person is not planning on owning the home long term it may not save money at all. Shopping around to different lenders can also give different rates.

      A person’s credit rating will also help in terms of mortgage interest rates, although only up to a certain point. Many lenders have a credit rating threshold, such as a score of 700 and above, when determining interest rates.

  2. Great information. I used to work at a bank, and the whole paying extra bit will probably not catch on all that well, haha

  3. Jessica says:

    Good info Gian. That extra $100 a month can really make a difference on the length and total of the mortgage.

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