Your mortgage payments will most likely
the single largest expense of your lifetime.
This article will show you how to take control
of your financial future and save thousands
of dollars over the life of your mortgage.
The interest paid on a home mortgage typically costs the homeowner nearly twice the cost of the home!
If you were to buy a $150,000 home with a $120,000 mortgage (80%), at an interest rate of just 9% for 30 years, when the mortgage is paid off you will have paid over $227,500 just in interest, in addition to the original $120,000 mortgage amount. That's nearly twice the cost of the home!
A typical credit card debt amounting to the national average of $7000 at 18% interest could take over 29 years to pay off, almost as long as a home mortgage. The interest paid on this account will top $18,400, more than two and a half times the original debt!
If you work for a living, you surely realize that when you're not working, you're not earning any income. But interest never takes a sick day or a vacation and it never sleeps. It is working against you all day long, every single day as long as you owe on the mortgage or other debt.
So what can you do to reduce the amount of mortgage and consumer debt interest that you'll have to pay?
You may not be in a position to pay off your entire debt or mortgage right now. You may not have enough equity built up in your home for a loan. You may not be able to afford the costs of refinancing or taking out a home equity loan. And you may not be able to lower your consumer loan interest rates.
But you can make extra payments to help reduce the interest charges!
So how does making an extra principal payment help lower your total interest charges? Will it make next month's payment smaller? If you can't scrape together enough for an extra payment, how can just $10 help when you owe tens of thousands on a mortgage?
The secret lies in making early and regular extra mortgage or loan payments.
For example, on the sample home mortgage above, if you could pay just an extra $100 each month, you would save over $82,000 in interest payments. And best of all, you would also have your mortgage paid off nine years and two months earlier. Just by paying an extra $100 a month, you could knock nearly 10 years off of your mortgage.
How is that possible just by paying $100 extra on your mortgage each month?
Well, that $100 extra that you pay the first month would have cost you about $270 in interest over the full 30 year mortgage term. Since you have paid it already, you can automatically reduce your last mortgage payment by $270.
The next month's extra $100 payment will reduce your last mortgage payment by another $268. Each and every month that you pay that extra $100 on the mortgage, your final mortgage payment will be reduced until you won't need to make a final payment at all, then the next to last mortgage payment, then third to last and on and on.
Before you know it, you'll have trimmed several years and thousands of dollars in interest charges from your mortgage repayment schedule!
That's sounds great, but what if you simply can't spare an extra $100 each month. Could you spare $50, $25, or even $10 extra to apply to your mortgage?
An additional monthly payment of only $50 will save you five years and seven months and about $52,000 off your mortgage repayment schedule.
An even more manageable $25 extra each month will cut your time by three years and three months, saving you about $30,000.
And Just a miniscule $10 a month extra will reduce your time by one year and three months and save you over $13,500!
As you can see, every little bit helps. Some months you may only be able to add an additional $10 to your regular mortgage payment. Other months you may be able to add an extra $200.
And in addition to mortgages, this principle applies to interest on consumer loans or any other kind of debt repayment as well. Paying down as much of the principal as you can each month will help reduce the total interest that you'll be charged and the length of time it takes to pay off the loan.
So why don't the lenders simply charge you more of the principal amount each month?
How would you like to be making 18% interest on an investment? Wouldn't you want to ensure that this investment lasts as long as possible?
Of course you would, and so do your creditors! They're happy for you to pay off your balance, but they love for you to keep paying them that 18% interest month in and month out.
Here are some other interest tips and tricks.
You can take control of the interest charges on your mortgage and consumer loans. Discipline yourself and make those extra monthly payments. The wonderful feeling of being debt-free will far outweigh the temporary pleasure of any short-term expenditures.
- Your mortgage company may have included a prepayment penalty in your mortgage terms. If you decide to pay off your mortgage early, they may actually charge you for the privilege of doing so. Or they may only apply a portion of your payment to the principal amount and take the rest as a "service charge."
- When you make an additional mortgage payment, make sure that you send a check separate from your regular monthly mortgage payment with instructions that the extra payment is to be applied only toward the principal amount of the loan. Otherwise they might simply apply it towards your next month's mortgage payment and still charge you the interest.
- If you're considering refinancing your mortgage, look for a mortgage that allows you to pay on a bi-weekly basis. Since many people get their paychecks every two weeks, this also makes it easier to budget your money each month.
By paying every two weeks, you'll automatically make an extra monthly payment every year (26 bi-weekly payments instead of 12 monthly payments). And since you're paying the principal down every two weeks instead of every month, your interest charges will be reduced.
David Berky is president of Simple Joe, Inc., a marketing company that sells simple, easy to use financial software.
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