Paying Extra Each Month Can Save You Thousands!
Paying off your mortgage does not have to take as long as you originally thought and you don’t need to win the lottery or receive a huge inheritance to do it. You could even save yourself thousands, just by paying a little extra each month.
What is an amortization schedule?
When you are looking to buy your home and taking out a mortgage, most people overlook the amortization schedule which is a more in depth break down of the actual amount you will have paid by the time your mortgage has been paid off. One example would be if you were to take out a mortgage for $100,000 at 6% APR. Over 30 years you would make 360 payments of $599.95 to keep up with our repayments. In interest alone you would pay $115,838.19 over that period plus the initial loan amount of $100,000. This means that you are paying more in interest than you are for your actual mortgage! In total over thirty years you would have paid out a grand total of 215,838.19.
6% APR is not a bad interest rate for a mortgage and of course seems appealing if you only take 6% off the loan amount. This unfortunately is not how it works, which is why by the time people add it up in total they are so shocked.
How can I reduce the total amount I pay?
Although these figures seem quite scary and you will have already signed up for a mortgage, there are ways that you can take years and thousands from paying off mortgage. The best way to do this is by paying in extra each month. Check first if your mortgage provider allows this as some penalize borrowers for doing so. Once you have been given the go ahead you can start to reap the benefits.
An example of saving this way is if you took out a mortgage of $ 150,000 over 20 years. With an interest rate of 5% it would cost $237,584. If the same person were to put an extra $100 every month they could reduce the final amount by $14,300. This is a staggering amount and if looked at in time length rather than monetary values this would equal nearly 3 years payments. That could make the difference between you taking an early retirement or not and with the money you save, you could have a nice little nest egg waiting for you.
Can I use my savings?
You can use your all or some of your savings for paying off mortgage do this in bulk rather than monthly, but if the interest your savings account accrues each month works out to be more than the savings you could make then it would not be worthwhile. You would need to have a considerable amount of savings for this to be the case though.
You can save even more money because savings you put into your mortgage are not taxable in the way that interest on your savings are. Many people are choosing to pay reduce their mortgage length and final payments this way. For a long time most people didn’t realize the final amount they paid in until a decade or more after paying, now you have the knowledge you also have the power.