A new home means a choice between the higher monthly payment (but shorter interest time) 15-year mortgage and the lower monthly payment (but longer accrued interest time) 30-year mortgage. Since most home buyers opt for the lower monthly payment, the 30-year mortgage tends to be the default choice when applying for a mortgage. However, those extra years of interest payments can add up to some significant costs.
So how can a home buyer enjoy the lower monthly payments yet still avoid having to pay back over 30 years? Below are some tips on how you can cut your loan time down and add some dollars back to your savings.
Make Biweekly Payments
The simplest place to start in shaving down the years on your loan is by making biweekly mortgage payments. Paying half of your monthly mortgage every other week results in an extra month of payments each year. Instead of making 12 payments over the course of a year, you make 13. Added up over the life of the loan, this strategy can cut off four years!
Bump Up Your Monthly Payment
The biweekly system essentially means you pay a little extra money every month. But what if you were able to pay more? Take the time to look at your finances and see how much extra you can allocate to your monthly mortgage payments. You might be surprised to learn that even an extra $200 per month can save you tens of thousands of dollars by bringing your loan’s life down by six years!
Refi + Reinvesting
When interest rates drop it is usually worth at least running the numbers to see how refinancing your mortgage can save you some money. At the same time, you can use this as an opportunity to cut down on the number of years left on your loan.
Refinancing your loan at lesser interest rate results in a lower monthly payment. As a result, you will find yourself with some extra money at the end of each month. So consider the following example: say your refinancing reduces your monthly mortgage payment from $1400 a month to $1100 a month, giving you a savings of $300. By putting in place a strict reinvestment policy, committing to applying that $300 each and every month back to your mortgage payment, you can shave off more than 9 years off of your loan. That is not only a lot of time, but also a lot of money!
If you are thinking about applying for a 30-year mortgage be sure to think about how you can also begin to put in place ways to cut down that time. It will be worth your energy to develop a strategy that can end up saving you thousands of dollars!