By paying extra on your mortgage payments, you may be able to save a considerable amount of money over the life of the mortgage.
In most cases, monthly mortgage payments consist of a portion of the principal, interest payments and escrow payments for homeowners insurance and real estate taxes. The escrow amount for insurance and taxes are a fraction of the amount due either annually or semi annually; this amount is kept in an escrow account and the payments are made out of that account when the payments are due.
At the beginning of most mortgages, during the beginning few years, the majority of your payment is going towards interest payments and very little goes toward paying off the principal balance of the mortgage. If you are able to pay more towards the principal, especially in the first years of the mortgage, then you can save a considerable amount of money over the life of the mortgage. When sending in extra payments, make sure to include a note specifying that it is to be put towards the principal; otherwise it may be considered an additional payment and put towards the principal and interest.
As the principal amount decreases, your interest payments will decrease and you will be paying more towards the principal each month. One easy way to pay off the principal faster is to add a small amount to your payment each month so you don’t really notice the extra money going out of your account, but it is making a big difference in the balance of your mortgage over time.
Another option is to apply any larger amounts of money you may receive to your mortgage. These sources of money include bonuses at work, gifts of money and tax returns. It may seem like a sacrifice to put this extra money towards the mortgage, but once you get the mortgage paid off early you will be able to spend the monthly mortgage payments on other things or put into savings.
If you have a 30-year mortgage and make payments for the entire life of the mortgage, you could pay up to twice the original price or more for the home over the years. Some people take out a 30-year mortgage with plans to make extra payments similar to a 15-year mortgage, but other expenses may come up and they don’t make the extra payments. One way to save on interest payments is to take out a 15-year mortgage instead of a 30-year mortgage. You will have larger monthly payments, but if you can afford the higher payments, you will save a lot of money on interest payments.
The small extra amounts may not seem like it will make a big deal on your mortgage, but little by little it will whittle down your mortgage balance. By sacrificing for a few years, you can get you mortgage paid off sooner.
By paying a little extra towards your home mortgage over the life of the mortgage, you can save a considerable amount in interest payments.