If you’ve been paying close attention to the real estate market, you know that interest rates are rising—but that doesn’t mean you can’t save money on your mortgage. For those who searched and bought during a fiercely competitive ‘seller’s market’—then you already know: When it comes to the actual price you’ll wind up paying for a home, there are factors within your control (your credit history/score, for one) and factors beyond your control (market conditions, recent comps, and bidding wars are a few that come to mind).
It’s common knowledge that a solid credit history and high enough score will ensure lower interest rates on your mortgage. But not everyone is aware of the fact that the manner in which you pay your mortgage can wind up saving you thousands of dollars down the road in interest fees, not to mention cut multiple years off of your home loan. If you have the means, there is no doubt about it: paying a little extra on your mortgage every month will pay major dividends in the future, proving a vital component of your long-term wealth strategy.
Just think—if you save just $50,000 in interest charges, that’s money you could put toward your retirement. Got kids? You could also set it aside in a college fund. Or rather, do you have the itch to travel? Put that money aside to fund your family’s next several vacations—seeing the world guilt-free will prove an amazing experience, and one that’s well deserved! The possibilities are literally endless, but the important question isn’t really what you’re going to do with the money you save.
The interesting question is, which strategy are you going to adopt in order to make certain that money actually remains in your proverbial pocket once you buy a home? Below, we get into three of our most commonly recommended tactics for paying off your mortgage at a more rapid pace, in turn saving (tens of) thousands of dollars down the road.
Money-saving tactic #1: Increase the size of your monthly mortgage payments
This one is arguably the easiest way to pay down your mortgage without feeling much of a strain on your budget. All you need to do is calculate what one-twelfth of your current payment is, and then add that amount to what you’re currently paying to get the new amount. For instance, let’s say that your monthly mortgage payment is $4,000. One-twelfth of $4,000 is about $333.33 … the price of a modest car payment. If you have $333.33 to spare each month, of course you could also just save it.
But if you sit down and do the math and see what stashing that amount in a savings account looks like for 10, 20, or 30 years down the road versus using it to pay down your mortgage faster, we’d be willing to bet that you’ll be shocked at the extent to which the latter approach would yield a far greater return.
Money-saving tactic #2: Make a single extra payment each calendar year
If your job is such that you can count on a sizable annual bonus—or even just a nice tax return—this approach may be the easiest way for you to save money on your mortgage. It doesn’t really get any simpler—all you’ll do when that bonus or tax return hits your bank account is make a full extra mortgage payment right then and there. By doing so, you’ll cut the lifespan of your current loan significantly and save thousands down the road. And, depending on the size of your bonus or whether you typically just stash it away into your long-term savings, you may not notice it one bit.
Money-saving tactic #3: Change the frequency of your monthly mortgage payments
This one takes a little more effort than the two aforementioned tactics for saving money on your mortgage, but with the same long-term reward—specifically, the recommendation is to pay half of your current monthly mortgage payment every two weeks, rather than paying the full payment once a month. Because some months have more than four weeks, at the end of the calendar year, you will have made 26 half payments, which of course is the equivalent to 13 complete payments—that’s one extra mortgage payment each year. As for how exactly you do it, perhaps you set a calendar reminder so that you’re notified every two weeks to put a check in the mail. Alternatively, if you can set up automatic payments that will be debited directly from your bank account, all the better—that means zero extra effort on your end. And zero excuses not to take this vital step toward greater future wealth!
The bottom line: Every little bit helps to save money on your mortgage
Perhaps none of the above options are quite right for you to help save money on your mortgage—but if you’re unable to make the equivalent to one extra mortgage payment each calendar year, why not just do what you can? Here’s an estimate of the savings an extra $100, $200, $300 (and so forth) each month will net you by the time your loan is paid off, assuming a $200,000 30-year home loan with an interest rate of five percent: