What will it take to truly OWN your home?
Published Date 1/30/2024
Thirty years. Perhaps it’s not a long time in the big scheme of things, but the thought of making payments on anything for that long is something a bit overwhelming when you stop and think about it. As Realtor.com’s Deborah Kearns puts it, “30 years of paying 4% interest on your $200,000 mortgage can seem like indentured servitude—especially when you consider that those interest payments add up to tens of thousands of dollars over the life of your loan.”
So how can you speed things up? “What if you could pay off your mortgage in less time—and whittle down that crazy interest you’re forking over each month?” she asks, and goes on to offer a few expert-approved tips to get you started and on your way to putting money back in your wallet.
The first is to make one extra payment each year. The idea is nothing new, but it can shave four years off your loan. “You can opt to make the extra payment at the end of the year, or any time you get a lump sum of money. Just make sure to indicate it should be applied to your principal,” says Kearns.
She also suggests if making smaller, more manageable payments is more in line with your comfort level and budget, you can do that, too. “For example, let’s say you have a $200,000 mortgage with a fixed interest rate of 4% for a 30-year term. The total amount you’d pay for that 30-year loan in interest alone is $143,739. But say you made an extra $100 payment toward your principal each month over the lifetime of your mortgage. You’d shave five years off your loan and pay nearly $27,000 less in interest. That’s huge!”
As with extra annual payments, make sure you earmark these additional monthly payments specifically for your principal. Otherwise, the extra money will get absorbed into the following month’s mortgage payment. That means calling your lender to make sure your lender applies those extra principal payments correctly.
If you want to compare this to biweekly payments, there are some caveats to keep in mind. Splitting up your monthly payment into two smaller ones will help you reach your goal faster, and you’re locked in. But miss a payment, and you’ll be hit with fees and/or hefty penalties. Most experts suggest simply making an extra payment when you can—whether that’s once a year or every other month—instead of committing to a biweekly schedule.
Refinancing has always been a great option when the time is right and the funds can manage it. “If you bought your house when interest rates were higher than they are now, refinancing from a 30-year mortgage to, say, a 15- or 10-year loan will save you a huge chunk of change on interest,” says Kearns. But she warns that although shorter-term loans tend to have much lower interest rates, you generally need to have at least 20% equity, based on your home’s current market value. Otherwise, you’ll be stuck with private mortgage insurance.
Some caveats: Shorter-term loans also come with higher mortgage payments, and refinancing has its associated costs as well. Ask your lender to crunch the numbers to determine when you’ll break even on those costs, especially if you don’t plan to stay in your home for the long term.
One more idea? If discipline and consistency are your middle names, set up an amortization schedule of your own. With this plan, you can skip the fees and closing costs of a refinance and figure out the monthly payment you’d need to pay off your loan within your desired time frame.
“An amortization schedule is a more aggressive (and structured) tactic than simply tossing a little extra cash at your mortgage principal each month,” says Kearns. “If done right (with your mortgage lender’s help), an amortization schedule will mimic the effect of refinancing from a longer-term loan to a shorter-term period, minus the fees and paperwork. Keep in mind that it won’t change your regular monthly payments or cut down your interest right away, but it will lessen your repayment time (perhaps by as much as 10 or 15 years!) which, in turn, saves you heaps on interest.
In the end, it’s all about what you hope to achieve. Taking 10 or 15 years off your loan by refinancing sounds great. But if you’re diverting that money away every month from your child’s education or other financial obligations, you might think again.
Realtor, TBWS
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
NMA Home Loans is Licensed by the California Department of Real Estate under License # 01111689 and NMLS # 320740
