A red brick house with a white picket fence has been the dream of many Americans for a long time, and in the past few years, more and more Americans have been buying their own homes and making their dreams come true. Still, millions of us don't fully understand how our mortgages work and, as a result, don't take care of them in a proactive way. There are many simple things you can do over the life of your mortgage to save tens of thousands of dollars.
Have you ever thought about how much you could save on your mortgage if you paid a little more each month? It doesn't have to be much, maybe an extra $50 here or $100 there. Most of your mortgage payment in the first few years goes toward paying off the interest on the loan. Every extra dollar you can put toward the principal will reduce the total amount of interest you have to pay over the life of the loan.
But wait, it gets even better! If you find that you can send in a whole extra payment, you are using your fixed payment, say $600, as a way to invest. That extra payment will go toward paying down the loan's principal, and you'll save money on interest charges over the life of the loan based on the interest rate you're paying. So, if you are paying 6.75 percent and make an extra payment of $600, you are lowering the total amount you will have to pay back on your loan by the amount that payment has grown to. If you still have 30 years left on your mortgage, that extra payment will save you a total of $3,968. Not at all a bad choice!
But even though this sounds good, watch out for one trap: pre-payment penalties. Some mortgage companies will charge you extra if you pay off your loan early. Why? Because they weren't expecting to make as much money off of you as they are. When looking for a mortgage, make sure they don't try to charge you more if you're a smart shopper and pay off your loan early.
Another way to cut down on the amount of interest you pay over time is to pay your mortgage every two weeks instead of every month. Since there are 26 biweekly periods in a year, this means making an extra payment each year. Again, make sure that you won't be charged extra for paying early.
Refinancing is another great tool to use when the money you save will be more than what it costs to do. This is an important point because lower interest rates do not always mean you will get a better deal. When you get a mortgage, you often have to pay fees and closing costs, which can quickly eat up any savings you get from lowering your interest rate. This is especially true if you've been paying off your mortgage for a while.
Do the math before you jump to see if it makes sense for you financially to refinance at the current rates.
It's easy to make sure that your mortgage doesn't turn into a burden instead of a tool that helps you buy the home of your dreams. If you make a few smart financial decisions, you might be able to pay off your mortgage faster than you ever thought possible.
