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Round Up Your Home Loan Payments to Save BIG!


on 3/4/2020

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Taking out a mortgage is a long-term commitment. What if we told you there are some simple ways to maximize your loan payments, minimize the time it takes to pay off your mortgage, and you can save a lot of money all at the same time?

Here are a few options and examples you should consider to pay your mortgage off sooner.

Rounding up Monthly Payments

Let's assume you have a $165,000 30-year mortgage at 4.50% interest rate. Your current monthly payments, without taxes and insurance, are $836.03. Over the life of your loan, you will have paid $300,971.07 for the mortgage. If you increase your mortgage payments by a modest amount, to $850 per month, you could save approximately $5,357.80 over the life of your loan. Your total payments would be $295,613.27 and your home would be paid off in 29 years instead of 30.

Going a bit further, if you increase your payments to $900 per month, the total amount of repayment over the life of the loan will be $279,679.39, a savings of more than $21,000. You will shorten the time to make your payments by 49 months; instead of paying for 360 months (30 years) you will pay for 25.9 years, over four years less.

Splitting Payments in Half

Another possible way to take advantage of lower loan costs is to split your loan payments in half. Let's stay with the same mortgage information and split your loan payments in two. Rather than paying $836.03 you would make a payment every two weeks of $418.02. You’ll need to check with your mortgage lender to see if you can make payments like this directly to your loan or there may be a third party payment processor that would set this up for you.

The first thing that occurs is rather than making 12 mortgage payments, you would actually make 26; which is one full extra mortgage payment annually. Over the life of a 30 year loan, you would pay $112,013.28 in interest versus $135,971.07 if you were making only 12 monthly payments, a savings of nearly $24,000. Plus, you would pay your home off nearly 4 years sooner!

Not Just Mortgages

There is something to keep in mind, while we used an example of a first mortgage, this theory can be applied to any type of loan. Auto loans, student loans, personal loans, and home equity loans where you apply a rounded amount to your monthly payment can save you hundreds or even thousands of dollars in interest over the life of a loan.

Things to Consider

Before making any additional payments make sure your mortgage (or other loan) does not have a prepayment penalty in your loan agreement. This is important because you could lose money if you make extra payments and your mortgage lender assesses a penalty for prepayment. Prepayment penalties are not as common now as they were in the past but it is something to be aware of.

When sending additional payments, you should indicate the overage is to be put against the principal balance of your loan. This is important since your lender will need to apply those payments correctly and your loan will be recalculated. In some cases, you may have to put a request in for the lender to run a new amortization schedule.

Borrowers who have put a down payment of less than 20 percent and are paying mortgage insurance will benefit significantly from additional payments because it will help them increase the equity in their home. Once you’ve built up 20 percent equity, your lender will typically remove the monthly mortgage insurance. You can then enjoy lower monthly payments without the mortgage insurance, or take that savings and further apply it to your monthly principal payments; saving even more money in the long run on mortgage costs.

We’re Here to Help!

Small additional principal payments on your loan today could lead to big savings in the long-term! If you have questions on how to apply these tactics to your mortgage or other loans, we can help you out! From setting up automatic payments, to maybe even refinancing to lower interest rates. We are happy to review your loans.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents. 

© Genisys Credit Union and www.genisyscu.org, 2020. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content.

 

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