Business Magazine

A Simple Way to Save Thousands on Your Mortgage

Posted on the 17 March 2016 by Smallivy

HousePerhaps one of the hardest things to understand is an amortization schedule.  In setting up a mortgage people talk about things like points, prepaid interest, principle payments, and other aspects.  There are companies out there that claim they can switch you to a 26 week mortgage payment (for a fee) and save you thousands.  Unfortunately, this lack of understanding makes people pay thousands more than they need to on a mortgage.  Here are some things to know before you sign on the dotted line.

Avoid the 30-year mortgage if you can

Perhaps the worst mortgage in existence (assuming you don’t live in California where they have 50-year mortgages) is a 30-year mortgage.  If one faithfully pays the monthly payments it will take about 20 years to reduce the balance of the mortgage by half.  The reason is that in the beginning the whole value of the house is owed, so the amount of interest that builds up each month is large – most of the payment.  As the mortgage is paid off the interest that builds up is less and less, meaning that the payment includes more and more principle – you’re paying off the house and reducing the loan balance faster.

Pay more early – you’ll save on interest later

The trick to saving thousands is to pay more at the beginning.  Making extra payments during the first few years of a mortgage will takes years off of the schedule.  Given that each year’s payments will be $10,000 or more, this would mean saving tens of thousands of dollars.  Making extra payments at the end will make little difference.

A good way to do this without a lot of math is to look at your mortgage statement and study the principle and interest that was paid during the previous month.  The amount of principal that is paid during the current month will be slightly more than the previous month.  Likewise, the amount of interest paid will be slightly less (since the total of principal and interest adds up to the payment, which is constant).  For example, assume a $1000 payment was made, of which $50 was principal and $950 was interest.  The next month the balance due would be reduced by just $50, despite the $1000 payment.  During the next month, $55 might be principal and $945 interest.

Putting a plan into action

So how do you put this information to use?  If you pay an additional amount the next month equal to the principal amount from the previous month, you will be reducing your payment schedule by one month.  In our example, instead of sending in $1000, send in $1050.  By adding just $50 to your payment, you have avoided one $1000 payment.  That $50 has just saved you $1000!  When looking at things that way, it gets a lot easier to pay extra.   If you could pay an extra $1000, you would take almost 20 payments, or almost two years off of your mortgage.  This would be a savings of about $20,000!

As the mortgage starts dwindling the amount of principal paid off with each payment will increase and the interest decrease.  During the last few years your payment may be $950 in principal and just $50 in interest.  At that point extra payments make little sense since paying an extra $950 will just save you $50.  Sending extra cash to a mutual fund or stock account may make more sense when the mortgage is only a few years from being paid off.

It’s easiest to pay more when it does the least good

Sadly, as with all things, you’ll probably have a bigger income near the end of your mortgage and be more able to make extra payments than at the beginning.  The same holds true with savings where the amount you invest when you are young with a low-income makes a lot more of a difference than what you invest when you are old with a high income.  Luckily though, even if you are only able to send in an extra $50 per month at the start of a mortgage, it will make a big difference.

To ask a question, email  [email protected] or leave the question in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing


You Might Also Like :

Back to Featured Articles on Logo Paperblog

These articles might interest you :

  • Big Food Giants Manipulate Public Health Policy in China

    Food Giants Manipulate Public Health Policy China

    Coca-Cola is at it again. As soda sales decline in the United States and Europe, beverage companies look to emerging economies like China for growth. And, it... Read more

    The 15 January 2019 by   Dietdoctor
    DIET & WEIGHT, HEALTH, HEALTHY LIVING, MEDICINE
  • Jewellery for a Precious You

    Jewellery Precious

    Jewellery is always close to a woman’s heart. It completes her look and boost confidence. Considering the changing trends in jewellery fashion, it becomes... Read more

    The 15 January 2019 by   Dr.jenifer Sayyed
    LIFESTYLE
  • Rajshri Productions’ Next Is A Film On Friendship | Hum Chaar | Trailer

    Abhishek Dixit’s debut feature film Hum Chaar is a Bollywood film made under the banner of Rajshri’s film. Hum Chaar is written and directed by Abhishek Dixit. Read more

    The 15 January 2019 by   Themoviean
    ENTERTAINMENT, MOVIES
  • Saint Paul the First Hermit

    Saint Paul First Hermit

    Today is the feast day of Saint Paul the hermit. This is a sweet and delicate Oatmeal Bread topped with rolled oats and naturally sweetened with agave. Saint... Read more

    The 15 January 2019 by   Veronica46
    FOOD & DRINK, RECIPES
  • Irupathiyonnaam Noottaandu | Teaser | Pranav Mohanlal | Arun Gopy

    Arun Gopy’s Irupathiyonnaam Noottaandu is an upcoming Malayalam action-drama feature film starring Pranav Mohanlal and Zaya David in the lead roles. Read more

    The 15 January 2019 by   Themoviean
    ENTERTAINMENT, MOVIES
  • A Year Of Body Positivity

    Year Body Positivity

    Last January, as I sat there on New Years eve all set to make the same old resolutions I've made year after year for as long as I can remember, I realised how... Read more

    The 15 January 2019 by   Sparklesandstretchmarks
    DIARIES, SELF EXPRESSION
  • Garden Bloggers Bloom Day – Jan 2019

    Garden Bloggers Bloom 2019

    Euphorbia rigidaWhen I went out to take the photos for this blog post I was surprised at how much was in flower dotted around the garden. Read more

    The 15 January 2019 by   Patientgardener
    GARDENING, HOME

Magazines