Mortgage Payment Tips

Do you have a 15-, 20- or 30-year mortgage? Would you like to pay off faster? 

Here are a few tips on how using an alternative payment method could reduce the years you pay on your loan while potentially saving you thousands in interest over the life of the loan.

First, let’s take a moment to talk about loan amortization. Amortization is the process of paying debt, over a set period of time, with regular payments.  When a mortgage is first established, much of the monthly payment is applied to interest while just a smaller portion of the payment applies to principal balance. As regular monthly payments continue, more of the payment will be applied to the principal balance.

Split Your Payment:

You could pay down the principal on your loan faster by making half-monthly payments every 2 weeks, instead of the full payment once per month. Splitting the payment is equivalent to making 1 extra monthly payment each year. (Based on 26 bi-weekly payments equals 13 full monthly payments)

Let’s look at a mortgage scenario:

A $250,0000 mortgage is taken out on a 30-year fixed term at an interest rate of 4.25%. By making the regular monthly payments of about $1,230, the total paid back would be approximately $442,913 in 30 years. Of those total payments, around $192,913 of it is interest.

Now let’s look at that same mortgage, splitting the payment and paying every two weeks:

If you were to split the payment and pay $615 every two weeks, you could reduce the years you are repaying the loan by roughly 5 years. You could also reduce the interest paid by approximately $32,109. Splitting the payment and paying bi-weekly can provide a significant savings to any size mortgage.

Pay Extra Towards Principal:

If your monthly budget allows, consider paying extra towards your principal balance each time you make your payment. This will reduce the time it takes to repay your loan, in turn reducing the interest cost of your mortgage. Even a small additional payment, made every month, will help.

Let’s review the savings when extra is made to monthly payments:

We will use the same 30-year mortgage referenced in the scenario above; however, we apply an extra $100 to the payment each month. The extra principal reduces the term by approximately 4 years and interest paid is reduced by about $30,511.

If it fits within your budget, consider splitting and paying every two weeks or adding a little extra to your monthly payment. A little extra can make a big difference in the interest you will pay over the term of your mortgage. If you would like us to run some amortization calculations for you, please give us a call or visit one of our mortgage specialists today.