3 Tips To Reduce the Mortgage Interest You Are Paying = HUGE Savings
Rate! Rate! Rate! So, you want the lowest interest rate? We get it.
Interest rates are determined by how mortgage backed securities are sold and traded on Wall Street. When the market is volatile, so are interest rates. While it’s my job as a mortgage banker to monitor the market and advise you on when to lock in your rate, when to refinance or suggest options that best fit your financial goals as a homeowner, it’s important to know that there are other ways to reduce the interest you pay on your loan other than simply lowering your interest rate.
Whether you’ve recently purchased a home or have considered refinancing, you should evaluate your mortgage and implement ways to save money. Let’s look at three methods to reducing the overall interest you pay on your loan.
OPTION 1: Shorten the Loan Term
Here’s some food for thought:
A person will pay more interest over the life of their loan on a 30 Year Fixed at 4.125% than they would if they chose a 15 Year Fixed at 8.000%!
It sounds like a no-brainer. If you pay off your loan in a shorter amount of time, you are going to pay less interest. However, it’s important to understand how an amortization schedule works. Even though your monthly principal & interest payment on a fixed rate mortgage never changes from month-to-month, the principal and interest amounts do. Every monthly you make a payment, your loan balance goes down, so, the interest you are paying on the loan balance also goes down. The principal goes up, keeping your payment the same. Here’s how the principal & interest break down at various points of the loan term for a $300,000 loan at 4.000%.
| 30 Year Fixed | 1st Payment | 60th Payment | 120th Payment | Final Payment |
| Principal | $432.25 | $526.02 | $642.27 | $1,424.70 |
| Interest | $1,000.00 | $906.23 | $789.98 | $4.75 |
| Total Payment | $1,432.25 | $1,432.25 | $1,432.25 | $1,429.45 |
Notice how much quicker the interest drops by paying more principal monthly on the 15 Year Fixed.
| 15 Year Fixed | 1st Payment | 60th Payment | 120th Payment | Final Payment |
| Principal | $1,219.06 | $1,483.52 | $1,811.38 | $2,212.62 |
| Interest | $1,000.00 | $735.54 | $407.68 | $7.38 |
| Total Payment | $2,219.06 | $2,219.06 | $2,219.06 | $2,220.00 |
The numbers become staggering. For the above scenario the person with the 30 Year Fixed will pay $215,607 in interest over the life of the loan whereas a person on the 15 Year Fixed will pay $99,432 in interest. That’s savings of $116,175! If you are comfortable with a 15 Year Fixed payment, it’s a great way to reduce the interest you pay on your loan while expediting your principal reduction.
OPTION 2: Biweekly Payments
If you pay your mortgage monthly, like most homeowners, you’re making 12 payments a year. However, most lenders provide an option to setup biweekly payments. Once enrolled in a biweekly payment structure, you’re paying half your monthly amount once every two weeks in lieu of 1 full payment per month. Since there are 52 weeks in a year, you will make 26 biweekly payments — This equates to 13 monthly payments for the year.
Because you’re making the equivalent of 13 monthly payments each year, you will have made the equivalent of 1 extra mortgage payment, all of which gets applied towards principal. So, you’ll pay less total interest while lowering your principal balance at a much quicker pace.
If we look at a 30-year fixed loan of $300,000 at a 4% interest rate, a person would save nearly $35,000 in interest over the life of their loan.
| 30 Year Fixed | Total Interest Paid | Time Loan Will Be Paid Off |
| Regular Payments | $215,607 | 30 Years |
| Biweekly Payments | $180,784 | 25.8 Years |
| Biweekly Savings | $34,823 | -4.2 Years |
OPTION 3: Paying Additional Towards Principal
Even though you may have a fixed mortgage rate and payment, you can always make an additional payment towards principal. This is similar to biweekly payments where additional funds are applied towards your principal balance, however you choose how much extra you want to pay and how often you want to apply an extra payment towards your loan. Whether you want to set up a recurring amount to be applied with each month’s mortgage payment, or if you want to just pay a little extra from time-to-time, you can choose how much to pay and how often, and the savings will add up.
Using the same $300,000 loan amount for a 30 Year Fixed at 4%, applying an additional $200/month will save you over $50,000 over the life of the loan. In addition to the savings your 30 Year Fixed loan will be paid off in less than 24 years.
| 30 Year Fixed | Total Interest Paid | Time Loan Will Be Paid Off |
| Regular Payments | $215,607 | 30 Years |
| Extra $200 Monthly | $165,196 | 23.8 Years |
| Savings | $50,411 | -6.2 Years |
Calculate Your Savings!
I am happy to provide a consultation to help you find ways to save money on your mortgage payment. Feel free to contact me for a time to discuss.
You can also use the chart below to estimate YOUR savings by incorporating one of these methods..
Chris Ulrich – United Home Loans
NMLS #215735
