Have you ever calculated how much you are really paying for your house? Let’s say you financed $150,000 at 4% for 30 years. Just paying the minimum principal and interest payment each month for the full term on the loan will mean you will pay OVER $257,000 (and this does not include your down payment, closing costs, and other fees).
The good news is, you don’t have to pay all that interest. There are things you can do that can drastically reduce that amount.
But, first, you should check with your mortgage lender to make sure they allow you to prepay or pay ahead without fees, and if there are any special instructions. The last thing you want to do is pay extra and it not accomplish what you set out to.
The examples listed below are based on the following terms:
- Loan Amount: $150,000
- Interest Rate: 4% (fixed)
- Term: 30 years (360 payments)
Monthly Payment (Principal & Interest Only):
- 359 payments of: $716.12
- 1 payment of: $718.19
As mentioned earlier, if you make these payments on time every month for the entire term of the loan and do not pay anything extra you will pay out a total of $257,805.27. Let’s take a look at how you can reduce that amount.
Budget – Yes, the dreaded “B” word. Budget your money. Give EVERY dollar a home! Stick to your budget. Budgeting your money will benefit you in a number of ways.
Bi-weekly payments – Split your payments in half and make them every 2 weeks. This is equivalent to making 13 payments. Half of $716.12 = $358.06 every 2 weeks. Doing this will save you: an estimated $17,534.02 of interest.
Just simply making one full extra payment of $716.12 once a year will save you an estimated $16,859.79 of interest and allow you to pay off loan 4 years 1 month early.
$20/week extra – Save $20 per week for 1 year (52 weeks) for a total of $1040 and make a one-time payment. Do this every year and it will save you an estimated $22,791.27 and you would pay off loan approximately 5 years 7 months early. Wow! $20 a week goes a long way!
1 extra payment per quarter – Paying 1 full extra payment every quarter (3 months) will save you approximately $45,016.94 and the loan should be paid off 11 years 4 months early!
$1/day – Save up ONE DOLLAR A DAY and make a one-time payment of $365. Do this on a yearly basis and it will save you an estimated $9,349.05 and the loan should be paid off 2 years 3 months early. That seems pretty easy and a good return for $1 a day.
Pay an extra $100/month – Paying an extra $100 per month will save you $25,048.24 and pay off the loan 6 years 2 months early.
Refinance – If and when eligible, refinance to a shorter term. Although your payment and interest rate can go up, you will pay less of it over the shorter term.
Keep making your car payment – Did you just make that last car payment? Well, keep making it, just apply it to the mortgage. Let’s say you took on a mortgage in January 2010 and you financed a car at the same time and financed it for 6 years and your payment is $300/month. If you paid off your car by January 2016 and started in February 2016 applying that $300 to your mortgage, you would save $39,250.99 and shave off 12 years of payments!
Downsize – Sell your current house and use the profits to purchase a smaller one.
Save Your Change – Throughout the day, if you use cash to pay for things, chances are you are going to have some change in your pocket at the end of the day. Place that change in a jar or bucket. At the end of the year, cash in that change and make a payment towards your mortgage.
Carpool to work as much as you can – Carpooling to work will save you gas. Track your savings and apply that to your mortgage. Every little bit counts!
Do It Yourself – Do It Yourself projects is a good way to save money. Take on a Do It Yourself and then figure how much you saved and take that savings and pay it towards your mortgage.
Bonus or Tax Refund – Did you or do you receive bonuses from work? Do you get money back on your taxes? These are good sources to make extra payments towards the principal balance on your mortgage, which will save you interest and shorten the time you are paying on your mortgage. A one-time extra payment of $10,000 could save you $14,420.01 of interest and 2 years 10 months of payments.
Raise in pay – When you get a raise in pay, it is another opportunity to pay extra on your mortgage to decrease the principal balance and the number of payments you make. You can either add each to your monthly payment or save up extra money and make a one time payment at the end of each quarter or year. Adding $100 to each of your monthly payments could save you $25,048.24 of interest and 6 years 2 months of payments.
Overtime – If you get paid hourly, and have the opportunity to work a few hours of overtime each week or pay period, it is another good source to make those extra payments. Let’s say you make $12 per hour on regular time. Overtime would be time and a half equaling $18 per hour. If you worked 5 hours of overtime each week, you could have an extra $360 per month to contribute to extra principal payments and could save $55,448.50 of interest and 14 years 3 months of payments.
Odd jobs – People and some companies are usually looking for odd jobs to get done. Are you a handyman, dj, etc. You could take on an extra gig every so often and use that money to pay on your principal balance.
Inheritance – Did you recently inherit some money or property? You could use some or most of the money towards paying down that mortgage. If you inherited a house you could sell the house and use those funds as well.
Don’t take the summer off – Some jobs/professions, such as teachers have schedules in such that they are off in the summer time or some time throughout the year. This would be a good opportunity to take on a summer job of some sort and use that money towards your mortgage balance.
Bargain Shop – Shop for sales, use coupons, etc. The money you save, apply it to the mortgage. Every little bit helps and it adds up.
Shop on Black Friday – Do you have a big purchase coming up? Christmas shopping? Etc. Black Friday is a very good source for major discounts. Once again, calculate how much you saved and apply it to that principal balance and save yourself some interest and time on paying that mortgage payment.
Buy used when can – Buying a new tv? Computer? Appliances? Hold on, stop right there. Search for slightly used, display models, or open box units. You can usually find these items in almost new condition and can possibly save a good deal of money that you can use to pay extra on your house payment.
Take advantage of rebates – Sometimes when you buy new big ticket items, you are given the chance to take advantage of a rebate. If you get a rebate that is on a gift card, use it to buy groceries or pay another bill and then apply that money as extra on your next mortgage payment.
Travel Smart – Travel during non-peak travel times, price shop for airfare, hotels, car rentals. Sometimes when you buy package deals you can get better deals. Another way to get deals on hotel rooms is to call the hotel directly and ask them if they have any specials on rooms not yet rented out for that night. Have a budget for your trip, but try not to spend entire amount. Any savings you have or any money you have left, apply it as extra payment to help trim down your mortgage balance.
Wasted Money – Do you eat out multiple times a week/month? Do you gamble or play the lottery? Cut your spending on unnecessary habits and pay down your mortgage!
Cut Down On Unnecessary Expenses
Check your phone rate plan – Evaluate your phone plan to see if there is any way you can cut back to save and apply to mortgage.
Check your energy plan – Shop your electric bill to see if you can get a cheaper rate. Also, look at your habits and usage to see if you can improve and cut back on usage.
Cut the cable – Do you really NEED the cable? Can you cut back to a cheaper package?
Don’t use credit cards– Credit cards are another expense, they charge interest. Save up and pay cash for everything.
Cut the gym membership – How often do you go to the gym? Maybe it would be worth it to buy some equipment to use at home. Or, maybe you can team up with a friend or two and take turns using the membership and split the cost.
Defensive Driving – Most insurance companies offer a 10% discount if you take Defensive Driving.
The more money you can save and apply to your mortgage to pay down the principal as quick as possible, the more money you will save in the long run.
For ANY reason you need to sell your house or are considering selling, please contact us at your convenience.
Disclaimer: The figures above are estimations and must be verified. Also, the amount of savings varies upon amount of extra payments, frequency of extra payments, interest rate, etc.
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