To help reduce the total interest you pay on a mortgage (or any loan) I would encourage you to make extra payments. If you get a tax return or a bonus, make sure at least some of it goes to repaying debt. High interest debt, like credit cards, gets top billing as my first recommendation for extra payments, but reducing mortgages help long term as well.
For example, if you have a $10,000 credit card balance at 19% annual interest (store cards range from 24% to 28%) and have to make the monthly interest payment and the monthly minimum principal payment of 2% (some are 3%) with a minimum payment of $20, you will pay the credit card off after 13.5 years and will have paid over $7,500 in interest. If you can make an additional payment of $600 each year in the first 5 years you will knock off over 3 years of payments and save over $2,300 in interest. It is well worth your time and money to try to pay off credit cards quickly, and not add to the credit card debt as you pay it off.
If you don't have much high interest debt, it can be a good idea to pay off low interest debt, like mortgages, early in the amortization which can also greatly reduce the interest you pay.
For example, let's say you have a $200,000 mortgage at 4.5% and you make monthly payments of $1,111.66 per month for 25 years. Assuming the same interest rate for all 25 years (which is improbable but necessary for the example) you will pay just over $133,000 in interest. If you can put down an extra $2,000 onto the mortgage every 12 months in the first 5 years, you will knock off 24 months worth of payments and save yourself over $15,500 in interest over the life of your mortgage. The extra payments more than pay for themselves.
As your debt is being repaid and your payments are no longer primarily going to interest, then you can start thinking about investing for the future. Hopefully you can reduce your debt early in life so you can start investing and saving for the rest of your life. It will be worth the sacrifice. Jerry
I can't afford an extra bulk payment each year, but I have made my mortgage payment every 2 weeks instead of just once a month. It works better with my paycheck and it nibbles down the principle a bit faster than once a month payments. My parents wish I would pay it down a bit faster, but I'm doing what I can. I hope to do more in a couple of years.
ReplyDelete