Did you know that if you borrow $100,000 for a mortgage loan, you may have to pay back as much as $300,000? Yes, it's true, and you may pay more than that depending on the interest rate and how long it takes you to pay back the loan. If the terms of your loan call for mortgage insurance, the amount is even higher.
There is a way out if you can pay a little extra each month, even if it's not much. Let's say you borrowed $100,000 and your first payment was the usual monthly payment of principal and interest, which was $825. As an example, early on in the loan's term, $800 might go toward interest and $25 toward the loan's principal. Your balance is now down to $99,975, and the interest for the next payment is figured out based on that number. If you had paid an extra $50 with the payment, that $50 would have paid two more scheduled principal payments and saved you two interest payments. If you used the numbers above as an example, you would have saved about $1,600. That's right, you would never have to pay the $1,600 in interest. Also, the amount of interest due the following month would be based on a lower balance.
The terms of the mortgage say that the full amount is due each month for both the principal and the interest. Most mortgage documents let you make extra principal payments (also called "curtailments") without a penalty, but you should check with the lender or look at the loan documents to make sure. If there are no penalties, you can save a few thousand dollars over the life of the loan and don't have to pay it off in thirty years. As we saw in the previous example, paying an extra $50 saved money on the interest. (The exact amount will depend on how much you borrow and how much interest you pay.)
The better it is for you, the sooner you start paying extra money toward the loan. In the first few years, most of your payment goes toward interest and only a small amount goes toward paying off the principal balance. As extra principal payments, these small amounts will be easier to pay, and the interest payments you won't have to make will save you a lot of money. As the balance goes down, the interest payments will go down as well, because the interest payment is based on the amount of principal still owed.
The principal balance will start to go down slowly, and before you know it, it will go down a lot. You should ask your lender for an amortisation schedule so you can keep track of your savings. This schedule shows how much is due each month for the loan's principal and how much is due each month for interest.
If your loan has mortgage insurance (MI or PMI), you will be able to get rid of it if you pay down your principal balance faster than planned. When a loan's loan-to-value ratio (LTV) is 80% or more, the lender needs this insurance. As your principal balance goes down, your LTV will also go down quickly. You should talk to the lender to find out more about cancelling mortgage insurance, since doing so early could save you a lot of money. This is on top of the money saved on interest.
So, if you want to save money on your mortgage loan, check your loan documents for any restrictions, ask for an amortisation schedule, and ask what you need to do to get rid of your mortgage insurance.
Enjoy Your Savings
