A cornerstone of the American dream is owning your own home. Once you’ve got a good-paying job and maybe started a family, owning a home is the next step you’ll take toward becoming an adult. However, mortgages are nasty things if you don’t tame them and keep them in check. In fact, if you’re not too careful, you could end up paying almost twice as much on your mortgage than you originally owed over a 20-30 year span. Here are a couple of tips that will help you save tens (or even 100’s) of thousands of dollars over the life of your mortgage.
Bi-Weekly Payments
Most mortgages are paid on a monthly basis. So, if your mortgage is $1,200 a month, you’ll pay that amount every month by a certain date. Paying bi-weekly splits that payment in two, so you’ll pay $600 every two weeks. It’s basically the same right? Not really.
Since there are 12 months in a year, but 52 weeks, if you pay bi-weekly, you’ll actually be making one extra mortgage payment every year. Didn’t I say this was going to save you money? It does—in the long term. When you make extra payments, the “extra” money goes directly to pay off your principal loan amount, lowering the amount of money you’ll pay in interest over the next 20-30
years.
To put this in perspective, if you have a $200,000 loan at a fixed 7% interest rate, making bi-weekly payments for the life of the loan will actually save $68,925 in interest, paying off your house in 24 years instead of 30.
Extra Payments
Another way to break your mortgage down is to simply make extra payments on your mortgage whenever you can. Instead of paying what amounts to an extra mortgage payment every year by paying bi-weekly, you can simply add an extra $10, $20, $50, $100, $200, or more to your monthly payment. On a bi-weekly plan, you’ll only pay an extra mortgage payment each year, saving you more than $68,000 in the previous example. But what if you made the equivalent of 2 extra payments each year (or 3 or more) by simply paying a little extra each month? Your savings could soar past $100,000 or more, depending on the amount you pay each month, your interest rate, and the life of your loan.
How to Make Extra Payments
Making extra payments is easy. Most lenders offer a bi-weekly payment plan, and they should all accept extra payments on your mortgage.
Before you borrow, ask your lender if they have such plans. If they don’t offer bi-weekly plans or accept extra payments (or ask a fee
for this service), find another lender immediately. Saving money on your mortgage is a simple matter of paying down the principal as
quickly as you can, and making extra payments makes that possible.