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Buying a house is expensive. There’s no way around that. How you repay your mortgage, however, can significantly affect the amount of money you spend on your home.
According to the U.S. census, the median sales price of new homes was $221,800 in 2010 (the most recent data available). Assuming that you borrow $200,000 and have a 30-year fixed mortgage with a four percent interest rate, you will spend a little more than $143,739 in total interest by the time you finish repaying the loan. That’s 58 percent of the home’s value.
Adjusting your payment schedule slightly will lower the amount of money you spend on interest. Changing your payment schedule can also help you get out of debt sooner. Making one extra payment per year will get you out of debt within 26 years instead of 30.
Consider these three options to determine which one matches your budget best.
Most mortgage lenders expect you to pay them once a month. This is a convenient way for the lenders to think about payments, but it probably doesn’t fit your household budget very well, especially since most people get paid every other week. If you make biweekly half-payments, then you only have to write checks when you know you have money in the bank.
Biweekly half payments will also help you save thousands of dollars over the life of your loan. Monthly payments for a $200,000 loan without PMI, taxes or other expenses, will cost $954.83. When you break them into bi-weekly payments, you send in $477.42 every other week (or $954.83 every four weeks if you prefer to write fewer checks).
Following this schedule, you will end up making one extra payment per year. That small change means you will spend $121,300.49 on interest instead of $143,739.01. It saves you more than $22,400 during the life of the loan.
If a biweekly schedule seems too confusing or difficult, then you can simplify it by making one extra mortgage payment per year. You will still save about the same amount of money. You can make this payment at any time during the year, and it will give you similar savings.
Many people prefer making an extra payment when they get their tax refunds. The average tax refund for 2015 was about $2,893. That’s more than enough money to make an extra payment that will save you more than $22,000 by the time you finish repaying your loan.
Some people want to lower their interest payments, but they don’t want to deviate from the lender’s schedule. You can still take advantage of these savings by increasing your monthly payment by 8.3 percent. Paying an extra 8.3 percent each month is the same as making one extra payment per year (8.3 x 12 = 100).
If you find it easier to write a slightly larger check each month, then that’s a great way to save money over the next few decades.
Lowering the amount of money you spend on your home takes a little discipline, but it is within the grasp of most families. Review your household budget to determine which repayment schedule will work best for you. Just a slight adjustment can often save you thousands of dollars.