The Baker’s Dozen of Mortgage Payments
Paying down your mortgage principal will increase equity and improve your credit rating. But did you know that by simply paying an extra mortgage payment each year, you can reduce the life of your loan by several years? In other words, if you’ve obtained a 30-year fixed rate mortgage, you could effectively transform your loan into a 24-year mortgage.
Here’s a general example on how this might work:
- Original mortgage amount: $200,000
- Interest rate: 5.5%
- Term: 30 years
- Monthly payment: $1,135
- Total paid in full on your loan: $409,131
By paying an extra payment of $1,135 or in increments totaling $1,135 over the year, you reduce total amount paid and the life of the loan:
- Total paid in full on your loan: $367,828
- Money saved: $41,302
- Term: 24 years
Before you start pre-paying your mortgage, consider these factors:
An Upcoming Sale: If you’re thinking of selling soon, it might make more sense to save the extra cash for home preparation, last minute repairs and closing fees.
Paying off Other Debt: Mortgage rates tend to be much lower than credit card rates, school loans, and even car loans. Using the extra money to pay down higher interest rate debts will be better for your financial picture.
More Savings: If you’re thinking about paying down your principal, consider your current interest rate. You might be able to refinance your loan and save thousands of dollars each year. Getting a lower rate AND making an extra mortgage payment a year, will save money and reduce the life of your loan at the same time!
If you’re planning to stay in your home for the full length of your loan, consider paying down your principal. If you choose to do so, make a special note on the check that states that it is a “principal reduction” vs. an early payment for the next month. And as always, please call me if you have any questions. I’m here to make sure you have the lowest rate on the market!