For many, homeownership represents the ultimate American Dream. The way many achieve that dream is to take out a home mortgage loan in order to finance their home. When you make your monthly payment as required, then you’ll wind up paying almost as much in interest as principal.
That’s because, during the early years of your mortgage, your payments will go primarily toward interest. So how do you save money on those interest charges? To save you need to pay your principal down sooner. Here are four relatively painless ways to do that.
How To Save Thousands On a Home Mortgage Loan
Consider a 15-year mortgage instead of a 30-year mortgage. By opting for a 15-year mortgage and paying off your loan faster, you will save money on interest. Although you will have higher payments, over the long term you can potentially have years without a mortgage payment at all! On a $100,000 mortgage with a 4% interest rate, you can save $38,726 in interest by paying it off in 15 years instead of 30. The Motley Fool has a nice article that provides guidance to help you decide if a 15-year mortgage is right for you.
Make extra payments monthly or one large payment per year. When you do be sure that it is applied to the principal of the loan, not the full loan. Otherwise, the bank could apply it to the next month’s interest. By just paying $100 extra per month on a $100,000 mortgage with a 4% interest rate, you can save $21,998.23 in interest and pay off a 30-year mortgage 8 years sooner. See how much you can save with the refinance calculator on The Mortage Reports website.
You can also make one large payment per year by opening a savings account and saving 1/12th of your mortgage payment in it each month then withdraw it once a year and apply it to your loan principal. Also, putting tax returns and holiday bonuses toward your mortgage is a good way to make a large payment.
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Homeowners who come into a windfall consider recasting your mortgage loan. When you recast your mortgage, you pay a lump sum toward the principal of your loan to reduce your principal balance, which reduces your monthly principal and interest payment. Your monthly payment is then reset, or re-amortized, based on the new, lower amount due – and according to your original interest rate and loan terms. There are many benefits to recasting vs. refinancing. It’s low cost. Lenders typically charge around $200 for the service, but since it’s not considered a new loan, there are no closing costs. And, there’s no credit check or income verification required.
Refinancing may be the best choice, especially, if you are at the beginning of a 30-year loan or have had unexpected changes in your circumstances. When it comes to qualifying for a home loan, bad credit doesn’t have to hold you back. Homeowners and want-to-be homeowners with bad credit can turn to companies that specialize in alternative lending resources. Their flexible underwriting guidelines allow them to make bad credit loans tampa. These companies are great for people with nontraditional sources of income, too.
When you take out a home mortgage loan, remember banks are in business to make money. When a bank lends you money to buy a home, it does so to make a profit. The faster you pay down your principal, the less money you’ll pay the bank in interest. Leaving you more cash to save for retirement, college, or whatever other goals you have in mind.