If you're like most people, the mortgage is the biggest bill you have, and it seems like you'll never pay it in full. The mortgage payment doesn't have to take the full 20 or 30 years you selected, however. You can pay it down sooner and save a bundle of interest. Apply extra funds to the principal, the money you borrowed and still owe, to pay it off quickly. Some lenders make it easy and others require you to jump through a few hoops.
Check your rate and your tax situation before you decide. Sometimes, it's better to apply the funds to other bills or an IRA if you have a low fixed rate or a high taxable income. Sometimes, it's better to deduct the interest and use a Roth IRA for your savings. When rates go up, you'll end up making more tax-free interest on the Roth than your mortgage charges and get the deduction on your taxes along the way. If your rate is adjustable or high, paying it off is often the best option. That interest is not predictable and normally increases, right along with your payment, as time passes.
Ask your lender whether you can make an additional payment to your principal in any amount. Some lending institutions allow you to make a payment toward the principal balance in any amount at any time you wish. If your mortgage is really a home equity loan, a line of credit against the equity in your home, there's no problem. You can adjust the payment anytime. Other institutions require that you stick to principal payments shown on an amortization schedule. The amortization schedule shows how much of each payment goes toward interest and how much goes toward principal.
Create an amortization schedule if your lender doesn't allow you to pay extra payments in any amount or ask the lender if they'll provide a copy. To create one, use a mortgage calculator and input your original mortgage amount, the interest and the number of payments. Even if your lender allows additional payments in any amount, this tool helps you calculate the difference as little as an extra $20 a month makes on the principal. Some people take a longer mortgage with a lower payment and plan to pay it off sooner. They do this to keep payments affordable in case there's an emergency, and use extra payments to the principal to pay it off in a shorter time.
Pay your mortgage bimonthly. If you're just setting up the mortgage, you often can request this at no charge. Some institutions charge for the service, particularly if you already have the mortgage; the fee could be more than your projected savings or very close. It does save on interest, however, but you should consider all factors.
- Establish a separate mortgage account and keep an extra payment in your mortgage account or make a full payment ahead before you begin paying down the balance. If you find you'll be a day or two late for your mortgage somewhere in the future, there's no sweat and no late fee. While this approach does not save you the most interest, it's a good way to save your credit rating, overdraft fees and late fees.
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