The 30-year fixed mortgage is the gold standard for financing the purchase or refinancing of your home. There are a number of options to pay off your mortgage early and save thousands of dollars in the process.
To start, I’ll explain how the standard 30-year fixed mortgage works. A $300,000 mortgage with a 4 percent interest rate is used in this example. The payment is $1,432.25 a month with principal and interest. Every time a payment is made, the lender first applies the amount received to interest, and the leftover portion is applied to the principal.
The balance on the loan decreases at an increasingly faster pace as the loan is paid off. You will owe 64 percent of what you borrowed ($192,800) in 15 years; 47 percent ($140,500) in 20 years; and 26 percent ($76,600) in 25 years.
Most of the loan balance is paid in the last 15 years of the loan. If you keep the loan for 30 years and always make the required payment, you will pay $215,610 in interest over the life of the loan.
One option to save interest is to take a loan with a shorter amortization period, such as a 10-, 15- or 20-year fixed mortgage. The downside to this option is the payment is larger. The 10-year fixed payment is $3,037; a 15 year payment is $2,219; and a 20-year payment is $1,818.
In the past, lenders offered substantially lower interest rates for shorter-term mortgages, which rewarded buyers who were willing to commit to a higher payment. Recently, the difference in rates is very small, so the benefit is negligible. Therefore, I recommend that borrowers take a 30-year mortgage and voluntarily pay more than is required, unless the borrower will be tempted to spend the additional principal money on something else.
As an example, if you paid $2,219 every month instead of the $1,432.25 minimum payment, your mortgage will have a zero balance in 15 years. Some buyers cannot afford a 15 year payment in the early years of the loan, but they can pay off their mortgage early and save thousands in interest by slowly increasing the additional amount they pay every month to principal as their income increases.
Another option is to set up your mortgage payments on a biweekly schedule. By paying half your mortgage payment every two weeks, you will make 13 full payments a year, which will get your 30-year loan balance to zero in about 22 years. Be aware of third- party firms that will charge you to set up a biweekly program. You can do it yourself or directly with your lender for free.
Steve Setka is an exclusive buyer’s agent with Keller Williams Realty in Durango and a licensed mortgage originator. He can be reached at 903-7782 or steve@durangore.net.
