How to Reduce Your Mortgage Amount

by Cheryl Withrow, Demand Media
    Write an extra check each month and apply it to mortgage principal.

    Write an extra check each month and apply it to mortgage principal.

    We all want to save money. If you own a home and have a mortgage, you can save a significant amount of cash by enlisting one or more of a variety of prepayment options. While engaging in a prepayment strategy will not reduce your monthly mortgage obligation, it will shorten the term of your loan and have a major impact on the amount of interest you pay in the long term.

    Step 1

    Shop for a bank or lending institution that offers mortgages for periods other than the standard 30-year variety. Besides the obvious reduction in loan duration, financing your home for 15 instead of 30 years has substantial ramifications for the interest you pay. For instance, a $150,000 mortgage at 5 percent for 15 years will cost you $1,186.19 per month, and the interest paid over the duration of the loan will be $63,514.27. The same mortgage paid back over 30 years will cost you $805.23 per month and the interest paid during that 30 years will be $139,885.27.

    Step 2

    Investing extra principal payments is a popular way to eliminate mortgage debt without breaking the household bank. For instance, if you forgo your daily cappuccinos and add the resulting savings, $160 per month, into a principal-only payment, you’ll save $11,446.48 in interest on a 15-year loan for $150,000, and $47,825.01 on a 30-year loan for the same amount.

    Step 3

    Making biweekly payments is another way to reduce the term and interest paid on your mortgage. Although not common, some lending institutions offer biweekly mortgage payment options, but if yours does not, you can accomplish the same thing on your own. Split your payment into two equal parts and pay that amount every two weeks. This option works to reduce your term by two weeks every year because there are 26 biweekly increments in a year, equaling 13 payments, as opposed to the standard, 12 monthly payments.

    Step 4

    Committing to a lump-sum principal payment each year will also impact your repayment term and interest amount. A good example of making a lump-sum principal payment is investing your yearly bonus in your home’s equity. If you’re able to make a lump-sum principal payment of $1,000 annually, you’ll save $31,264.85 in interest on the 30-year, $150,000 loan and $6,993.10 in interest for the same mortgage amount on the 15-year loan.

    Step 5

    Do the math before you consider refinancing your existing loan. To recoup costs associated with refinancing your mortgage, traditional thinking dictates that an interest rate decrease of 1 percent or more should apply before considering the refinance option. Refinancing your mortgage can reduce the term of the loan, from 30 to 15 years for instance; lower your monthly obligation, making it easier to invest in principal-only payments; raise cash for pressing needs or to pay off high-interest credit cards and even reduce your risk if you are pursuing refinancing to opt out of an adjustable-rate into a fixed-rate mortgage.

    Tips

    • When you get a raise, invest the increase in principal payments.
    • Use proceeds from your annual garage sale to pay down your mortgage.

    Warnings

    • Beware of hidden costs associated with refinancing.
    • If using a mortgage broker for financing purposes, check his credentials.

    About the Author

    Cheryl Withrow is a writer in Michigan’s untamed Upper Peninsula. Following a teaching career she served alternately as editor of the "Washington County News" and the "Geneva County Reaper," and as associate editor of "Bay Life" magazine. Withrow holds a Bachelor of Science in business with a major in accountancy from Wright State University and a Bachelor of Arts in English from Ohio University.

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