Thirty years is a long time. Especially when we’re talking about paying monthly payments for thirty years. As a National average, most American families only live in their home for 13 years before moving. This means that the vast majority of home owners are tied into a cycle of monthly payments on their mortgage and they still never actually live in a house that they own. Crazy, huh? As a home owner, there are always expenses. Your mortgage is likely one of your larger monthly reoccurring bills. However, you likely also have car payments each month, tuition for your kids school, vacations, credit card bills, your own student loans, medical bills….and countless other reoccurring bills that chip away at your hard earned income each month. It’s easy to get caught up in the month-to-month cycle and think there is no way out. Guess what? By getting stuck in the month-to-month cycle of payments, you are actually paying a lot more each month than you need to and zapping a LOT of income that can be channeled elsewhere. Don’t believe us? Check out these top tips to pay off your home faster and save money while you’re at it!
1-) Pay Smarter On Your Home Each Month. Your mortgage is going to be due each month. While you cannot change the amount due each month (without refinancing….which we will discuss in a second!), you can save money on interest over the life of your loan. Each month, consider making an additional payment designated to principle on your mortgage. Here is how it helps you.
Your regular payment that you are required to make each month includes interest and principle on your loan amount. At the very front end of your loan, the majority of what you are paying is interest that you pay to the bank in exchange for the money that they lent you for your home purchase. The principle amount of the loan is the part that is technically the “cost” of the house (without interest added on). As an example, say you take out a $200,000 mortgage to buy a home. You set up your mortgage on a 30 year term at a 4.5% interest rate. The house is priced at $200,000 and your loan amount is for $200,000. However, if you stick with making monthly payments at the rate listed in the example above, over the term of your loan, you will have paid $364,814 total for the house. That means that you will have paid $164,814 in interest alone. That’s pretty crazy. Talk about spending a lot of extra money……
Now we have a snap shot of how the payments work on a mortgage. When some homeowners realize how much money they are losing on interest payments, they catch the vision of accelerated payments…but they go about it in a way that doesn’t help them at all. For instance, some homeowners will just add extra money to each payment that they make each month without designating the extra money to go towards principle….and then get excited when they get a check from escrow at the end of the year for the overage payments. Sounds good, right? A check back at the end of the year??
Here’s where the problem comes in. Remember earlier when we mentioned that your monthly mortgage payments are a mix of interest and principle and that at the beginning of your loan the majority of your payments each month are just going to interest? Well when you pay more each month without designating to a principle payment and then get a check at the end of the year…..you aren’t helping to lower the principle amount of the loan. You are essentially just giving the mortgage company an interest free loan to use your money without it helping you in any way. Consider setting aside money each month that is designated to an extra payment to principle on your mortgage. This can help you pay down your balance faster and save you a ton of money in interest payments.
2-) Check To See If You Should Refinance. One of the big perks of refinancing is that you can lower your interest rate which, in turn, lowers your monthly payments. When you refinance your home, your home is appraised and assigned an appraisal value. The lender then decides how much of a percentage of the appraisal amount they are willing to lend to you. Factors such as credit score, past payment history, and debt to income ratios can all play a role in this. Once the bank determines the amount that they will lend you, the cost of the balance of your mortgage is subtracted and the remainder is loaned to the homeowners. While refinancing may sound like a great solution to lowering your monthly payments and your interest rate, you should look into your options with a mortgage professional before choosing to refinance your home. Some factors to consider when looking into refinancing are the fees associated with refinancing, the term you have left on your loan, and your credit score and financial standing.
All The Best,
Kelley Carter, CPIA
The Choice Insurance Agency’s mission is to help you get from where you are to where you want to be financially by planning, achieving your plan and protecting your plan from unexpected events. In the process, our goal is to deliver insurance services in a manner that exceeds your expectations. See what The Choice Insurance Agency can do for you today. Give us a call at 757-416-5100 to speak with one of the licensed, professional members of our team or request a contact here. The Choice Insurance Agency. We’re on YOUR side. 757-416-5100