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Many people think that the only way to save money on your mortgage is by shopping around for the mortgage with the lowest rates and points and fees. This of course is important to find the right mortgage for you. But do you realize the largest savings can be realized AFTER you have started to pay your loan. These savings can all be achieved without going through the trouble of refinancing.
The way to start saving money in interest ANYTIME is called making a prepayment. Here is an example of this simple way to save money. Lets say you purchased your house (or for that matter refinanced) and you took out a $250,000 fixed rate mortgage at 6% for 30 years. Your monthly payment (principal and interest) would then be $1,498.88. Do you realize that over the life of the loan, with principal and interest you will have paid back nearly $540,000? Can you believe that’s over $290,000 IN INTEREST ALONE on a $250,000 mortgage? Here is how to save thousands on those interest charges.
Please note: For your convenience, will be using the $250,000, 30 year, 6% mortgage and the monthly payment of $1,498.88 example to show various ways of saving money on your mortgage throughout this site.
When you make your $1,498.88 monthly payment, lets make what is known as an ADVANCE PAYMENT or a PREPAYMENT of principal of $100 on your principal for a total monthly payment of $1,598.88. By adding $100 to the $1,498.88 base payment each and every month, you will save over $51,500 in interest over the life of the loan. $51,500!! In addition you would have paid off your mortgage much sooner. Your mortgage would now be paid off in 25 ½ years instead of 30! Think about it, by making a small prepayment of $100 (about $3 a day) you would save over $51,000 in interest charges and own your home free and clear 4 ½ years sooner. And if you could afford to make a prepayment of $200 a month, you would save over $86,200 in interest and you would own your home free and clear in 22 years and 3 months. Here is how you can get these savings.
Each month when you make your mortgage payment, a portion of that payment goes towards paying the INTEREST on the outstanding balance of the loan first. The remainder of that payment then goes towards REDUCING the outstanding loan balance. Each month, then, the amount that is applied to interest will go down because of the lower outstanding balance, and a larger amount will be applied towards principal reduction.
How Prepaying your Mortgage Saves You Money
A prepayment is exactly what it says. When you make a prepayment, you are making a principal payment AHEAD of schedule. This is not an “extra” payment but rather a payment in advance towards your principal balance. By making a prepayment you lower your outstanding principal balance quickly, thereby reducing the amount you pay in interest over the life of the loan. It’s compound interest in reverse!
Prepay Your Mortgage to Save Thousands of Dollars In Interest