How to Save Thousands!
Did you know that it is possible to take years off your mortgage, reducing the amount of interest you will pay by as much as 25%? Well it is true, and you can save even more depending on your financial situation.
This may sound too good to be true, but it's not. If you can afford to pay an additional one-twelfth of the principle and interest payment for your mortgage each month, you can reduce the length of time it will take you to pay-off your mortgage by as much as 6 years, saving you thousands of dollars.
An example:
Let's assume you have a 30 year 6.25% fixed rate mortgage for $150,000 which was taken out in November 2004. Your monthly principle and interest payment on that loan should be right around $925.00 per month. By paying the standard payment each month for the full term of the loan (360 months) you will have paid more than $180,000 just in interest. However, if you were able to increase your payment starting this month, January 2006, by only one twelfth of the standard payment ($77.00), or in other words increase your payment to $1002.00 each month, you would pay off your mortgage 5.25 years sooner and save nearly $37,000 in interest. Is there anyone who wouldn't want to avoid paying their mortgage company that kind of money?
Other Options:
#1 – Bi-weekly payments. Some mortgage companies or third-party companies offer a bi-weekly payment plan. These plans generally consist of deducting 50% of your mortgage payment from your account every 2 weeks. Since there are 52 weeks in a year, this means that they deduct 50% of your payment 26 times per year, the equivalent of 13 payments per year.
#3 - Pay some additional amount each month even if you can’t afford to pay one-twelfth. This method may not gain you as much as paying one twelfth, but any amount of pre-paid principle each month will, over the long run, reduce the term of your mortgage and thus reduce the amount of interest you will pay.
Pseudo vs Real:
If you are currently using a bi-weekly payment plan or are considering one, you should thoroughly investigate how the program works, and what the real costs are. There are basically two kinds of bi-weekly plans, pseudo bi-weekly plans and real bi-weekly plans. The differences are in how your money is handled. In real bi-weekly plans (which are rare by the way) your bi-weekly payment is credited to your account when it is deducted from your checking account. In pseudo bi-weekly plans, your payment is made once a month as normal and an extra payment is made once a year, sometime after the two extra amounts are deducted from your account. And it is possible that the extra payment will not be made until the end of the year. So in other words, you are allowing someone else to hold and earn interest on your money for weeks. And what's better, you get to pay them for the privilege! Generally these programs (especially when offered by a third-party) have a startup fee that can be as much as $300.00 plus they will hit you with a service charge ($2.50 or more) each time they deduct money from your account.
Find the right plan for you:
If you are serious about trying to save thousands in mortgage interest, don’t be satisfied with just a great interest rate. You surely can find a plan that will work for you based on your financial situation and your financial disciplines. I found a great web site that might help: The Mortgage Professor - http://www.mtgprofessor.com/Default.htm. This web site contains lots of excellent information and advice about mortgages. It also has a number of different calculators that can help you plan the best way to handle your mortgage. Check it out, I found it very helpful and informative.
A Note of Caution:
If you choose to implement this sort of interest savings plan, make sure that the payment stub to the mortgage lender clearly reflects any additional payment as "Principle Pre-payment". Otherwise you may find that the lender has credited the excess to your escrow account and then wants to refund it all back to you at the end of the year because your escrow account has too much money in it.
In Summation:
This time of year is a great time to reassess your finances. Don’t overlook rethinking your mortgage. An increase in your monthly payment is probably the simplest and easiest way to save thousands in mortgage interest and it requires no involvement by any third-party. However, if discipline is an issue for you, there are many third-party plans out there, and possibly even one or two offered by your mortgage company. While most represent a variation on the theme, "pay off your mortgage faster, saving thousands in interest", they are not all equal in their simplicity, their potential savings, or in their costs. So, make sure you do your homework.
