Read this article even if you don’t think your mortgage costs this much!
Paying off your home faster gives you more money to put towards other activities and priorities in your life. Though it may be a challenging idea, you can do it with a little know-how and good old-fashioned grit! Here are three ways to help you shave off unnecessary mortgage interest allowing you to buy a new car, travel the world, retire earlier, or do whatever you want!
1. Try to scrape together at least a 20% down payment, if at all possible. This may be difficult for first-time home-buyers, but if you can scrape together a 20% down payment, it will prevent you from having to pay PMI (primary mortgage insurance) which generally costs about $100 a month. PMI doesn’t protect you as the homeowner at all. It only protects the mortgage company in the event of your defaulting on the loan. You’ll only be able to stop paying PMI once you pay the mortgage down to owning at least 20% of equity in the home. This takes an average of 9 years which equals $10,800 in PMI premium costs. In addition, you’ll be paying the interest on that 20% of the loan. If you took a mortgage out for $237,000 instead of $297,000, assuming it’s for 30 years and 4% interest, you’ll pay $43,000 less in interest.
2. Get the shortest loan maturity possible. Generally, mortgage companies advertise 15 or 30 year mortgages, but you can choose any type of maturity that you want be it 5, 13, or 23 years. If you choose a faster payback time, you’ll not only get a better rate, but also pay it back faster disallowing the interest to multiply over time. For example, with a mortgage of $237,000 at 4% for 30 years you’ll be paying $170,300 in interest. If you financed the same amount for 15 years at a rate of 3.5% you’d only pay $68,000 in interest. That’s a savings of $102,000!
3. Make one extra payment a year. In addition to implementing the above strategies you can also make one extra payment a year. You can either pay a little bit more each month, plan an extra payment into your budget for a specific time of year, or set up payments to come out of your account every 4 weeks instead of monthly. For a loan of $237,000 you could pay an extra $141 a month which equals one extra payment a year. This will help you to pay off the mortgage 17 months earlier and save you $7,100 in interest payments. This strategy’s results are more dramatic for situations where the above strategies are not already implemented, often cutting a mortgage’s lifetime and interest payments almost in half.
Implementing these strategies can be challenging but will end up saving the homeowner a total of $162,900, assuming a purchase price of $297,000, the median purchase price in Virginia in 2017.[i] This is over 50% of the original purchase price! Imagine what you could do with an extra $163,000.