One Additional Mortgage Payment a Year
There’s a simple trick to significantly reduce the length of your mortgage and save you thousands of dollars: make one extra mortgage payment a year and apply that payment toward your loan’s principal.
This is the method being used by “Bi-Weekly Mortgage Reduction Services“. Only, when you do it yourself, you don’t pay a third party unnecessary set-up costs and fees!
Example: $100,000 loan, 30-year mortgage, 6.5% fixed interest rate
Right now it may not be possible for you to increase your monthly mortgage payment. But keep in mind that most mortgages will permit you to make additional payments to your principal at anytime. Perhaps several years after moving into your home you receive a larger than expected tax return, an inheritance, or a non-taxable cash gift. You could apply this money toward your loan’s principal, resulting in significant savings and a shorter loan period.
With a $100,000, 30-year, 6.5% fixed interest rate mortgage loan, the borrower will pay a total of $227,542.98 to pay back the loan in 30 years. That equals $127,542.98 in interest payments.
If the same borrower makes a one-time $5,000 payment the first day of year 6, he/she will pay a total of$204,710.75 and pay off the loan in 27 years (324 months). That’s a savings of $22,832.23 in interest.
Buying Down The Interest Rate
Points, also known as “discount points,” are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is called “buying down the rate,” which can, in turn, lower your monthly mortgage payments. In effect you are paying some interest up front in exchange for a lower interest rate over the life of your loan. In general, the longer you plan to own the home, the more you might benefit from buying points because you will realize more interest savings over the life of the loan.
An important thing to consider is how long it will take for the upfront cost of the points to equal the savings you get on your monthly payment. To find the break-even point on a given loan, you divide the upfront cost to buy down the rate by the monthly savings. The result will tell you how long you will have to live in your home for it to be worth the upfront cost.