How To Pay Less Mortgage Interest – Paying off your loan faster can be done without a refinance…and you save interest…
This post has been updated – 10-24-22
If you want to be free of your mortgage loan as soon as possible, read this. This prior mortgage underwriter is going to give you the best methods and how to pay less mortgage interest and pay off your loan early.
Saving money is every home shopper or homeowner’s dream, right? Sure it is, and people especially hate paying long-term interest. When you look at the amount of interest you will pay on your 30-year mortgage, it can be astounding. It’s no wonder housing prices go up every year – well, until a bubble bursts anyway. For instance, after the mortgage meltdown in 2008, they were way down (a lot of people were underwater) and then a slight recovery occurred and up they go again.
The old saying that you should know before you go still exists and you can find out so much online as well as make the application online. After applying, sending documentation by email, or fax is now acceptable with most mortgage lenders.
Back in 2015 I did a refinance and never entered the bank’s mortgage office for the entire process. I did, of course, go to the attorney’s office for the final closing.
Examples of Some Methods to Save Interest
Purchase Transaction
A mortgage loan on a 30-year with a sales price of $223,000 – with $23,000, or 10% +- downpayment = $200,000 loan, with a 4.0% (+-) interest rate is a principal and interest payment of $954.83. You will eventually pay over $143,739 in total interest charges.
Bi-Weekly Payments Can Save You interest…***see below
With the same terms above for 30 years, a bi-weekly payment note/mortgage payment would be $477.42 bi-weekly (26 payments), and the interest would be $121,834.
Important note – some people get the bi-monthly mixed up with the bi-weekly.
Two different scenarios.
Bi-weekly is 26 payments or every other week. *This one is in our discussion.
Bi-monthly is 24 payments or twice monthly.
- You would be saving $21905 in overall interest with a bi-weekly mortgage.
- On a bi-weekly mortgage loan, you are paying 26 payments (every other week) instead of 12 monthly payments a year.
- Total payments for a 30-year loan -bi-weekly is 624 instead of 360 payments however, you are paying off your loan early and saving interest.
15 Year Term
If you decided to obtain a 15-year loan term, with an interest rate of 3.500 (+-) the payment on $200,000 would be $1429.77 with an interest of $57357. ***
***This is a saving of $86,382 which is highly profitable to any mortgage applicant who can afford the 15-year payment.
Bi-Weekly Payments on a 15-year loan
The loan amount of $200,000 principal and interest payment would be $714.88 with a total interest payment for the term of the loan in the amount of $51712.
- Bi-weekly payment is a yearly total of 326 payments instead of 180- which helps you pay off your loan earlier and saves you interest.
- Your determined interest rate will be lower on a 15 yr than a 20, 25, or 30-year loan
- A high credit score will also help your interest rate
You can also take out a new 30-year mortgage on a new loan and pay the 15 yr amortized payment if you want to be cautious in case the unforeseen happens. We do not live in fear, however, some people want to be thinking ahead. If the latter happened, you can always pay the 30-year payment and be just fine. *see below for saving interest on a current mortgage
The lender does not necessarily care as long as the full payment that is on the note and the mortgage/deed of trust is paid on time.
Here are some smart ways to eliminate the long-haul interest… let’s get creative
*Reducing your interest without a refinance on your current mortgage…
If you do not want to reduce the interest on your present mortgage loan, you can start where you are. Take the principal balance on your loan, amortize the remaining balance, calculate a 15-year principal and interest payment, add your taxes and insurance, and MI (if applicable). You can save interest without the refinance process.
You can save with this method by not paying for new closing costs and catching up with the interest you would add which can take about 36 months is you pay only the set principal and interest payment. (PI)
If you do the latter, you will not increase your mortgage balance with the new closing cost that would be required to make a refinance transaction.
**There is one catch to this scenario- you will definitely still have the 30-year interest rate and not the 15-year interest rate in both of the latter situations.
Summary Of Methods Listed Above
1) Have a High Credit Rating – If you have a good credit rating (over 740+-), you can usually qualify for the best interest rates. This will lower your interest payments. On the loan above but with a 3.750% (+-) interest rate, for 30 years you will save over $10,296 over the life of the loan. That’s money that could be invested and used for something else.
Note: You may also buy down your interest rate by paying extra dollars- this is called points on your loan disclosure
2) Make a Large Down Payment – The larger your down payment, the less the loan principal, and the less interest you pay overall. Not only that; you can usually qualify for more favorable interest rates the more you pay down. Let’s assume you paid $44600 down for the house for the sales price of $223,000 or (20%) to avoid MI as described above, still obtaining a 30-year term.
This would mean that you only financed $178400 and it also could possibly qualify you for a more favorable rate at 3.750(+-), or you could get a buydown. Your principal and interest payment would be $826.20 and your total interest would be $116031. In this scenario, you’d save over $24,708 in finance charges
*All interest rates are estimated interest rates, they fluctuate daily and each lender’s rate may vary slightly for their best quotable rates.
3) Pay Payments Bi-Weekly – A really easy way that is almost painless for most folks, is to ask the lender if you can pay your loan bi-weekly. A lot of people get paid bi-weekly so basically, you’d pay half of your loan payment every two weeks on your work salary schedule. This would cause you to pay an extra payment every single year. *see broken down above
4) Get a 15-Year Fixed-Rate Mortgage – Oftentimes if you get a 15-year mortgage instead of a 30-year mortgage, you’ll get half a percentage point less interest (+-). So, you’ll save on interest rates, plus you’ll save due to the time value of money. By moving to a 15-year mortgage, you’d lower your interest and total finance charges. Your monthly payments will go up, but in the long run, you are saving as you can see above.
5) Pay Extra Each Month toward the Principal – You can pay any amount you can afford each month to your principal balance and eliminate your total interest. If you paid $500.00 extra each month on the principal of your loan, the loan will automatically pay off sooner, in a short-term period.
6) Refinance If Interest Rates Go Down – If interest rates go down by at least 2% it is a more favorable loan transaction. There are often other fees involved in refinancing, so be sure to factor those in to figure out whether it’s really worth it for you or not.
7) Send Windfalls to Your Mortgage Principal – If you have the goal to pay off your mortgage early, then when you get windfalls, use them to send to your lender to pay down your principal. Every time you pay down the principal your interest calculation goes down and you will pay fewer finance charges over the life of your loan.
Saving interest on your mortgage loan can be energizing. It helps you be in control of your financial situation, and save for the future.
You can combine a couple of the methods above to increase your success. Paying off their home early isn’t for everyone. However, with interest rates as low as they are, they can be financially beneficial and prepare you for the future.
Still, for others, freedom can come from saving the additional money and investing it. The choice is yours.
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