When buying a home, people usually take out a 30-year mortgage. If you simply pay the minimum each month, though, you’re paying potentially hundreds of thousands extra in interest.
A $250,000 house with a 5% interest rate will have you paying back $230,000 in interest—almost the same as the home’s price tag! If this sounds daunting to you (it definitely does to us), don’t worry; you can easily reduce this cost by a huge amount.
The main way to avoid paying so much is to get your principal amount down as fast as possible. The interest rate is applied to the principal balance, and the quicker you get it down, the less you’ll pay in interest over time. Here are some ways you can do it:
1. Make an extra payment each year. Take the monthly payment and divide it by 12. Pay that amount each month in addition to your regular monthly payment. For example, a $1,200 monthly mortgage would mean you divide it by 12 to get $100; you add $100 to $1,200 and pay $1,300 each month. By doing this, you’ll have paid for 13 months in one year! Even better, you’ll knock eight to 10 years off of your loan.
2. Pay whatever you can afford. If you can pay extra on your monthly payment, do it. By doing this consistently, you’ll knock years off your loan. Most mortgages don’t have prepayment penalties, so you can pay as much as you’d like. Investing that money will save you a lot in the long term.
3. Pay a lump sum. If you get a work bonus or your tax refunds come in, it’s a perfect time to put a chunk toward your mortgage. Make sure that you’re specifically allocating this money to your principal amount, which you can usually do online or on the voucher itself.
By paying just a little bit extra each month, you’ll save on interest and shorten your mortgage length. If you have any questions or would like more information, feel free to reach out to us. We look forward to hearing from you soon.