A homeowner builds equity in their home and as that home appreciates it guarantees the value of their investment. Going into your home buying experience, you may have resolved the fact that you will have a mortgage payment for 30 years. But what if you could quickly increase your equity while reducing interest owed on your loan. Would you do it?
First, you could look into a shorter term mortgage that pays off in 20, 15 or 10 years. Benefit is that they will often have a lower interest rate and fees. Freddie Mac did a recent comparison in their Primary Mortgage Market Survey and found a 30-year fixed rate mortgage carried 4.04 percent where a 15-year fixed rate carried 3.20 percent. They also found the fees for the 15-year mortgage were .1 percent less. It’s a given that the shorter term loan will have higher payments but it will save you interest and save you money in the long run. Saving money is always a good thing.
Second option is to make contributions to the principal on your mortgage. These payments can be made in-between your regular monthly payments and will save you interest. Take your annual bonus or tax return and apply toward the principal. These payments will build your equity and shorten the term of your loan too.
Being vigilant in paying extra portions is the biggest hurdle. You might decide to add an extra $100 or $200 each month. Setting it up ahead of time using your online banking service could help to insure that you pay consistently.
If you are paid every two weeks, set up a bi-weekly payment. If you make 26 half payments within a year it will equal 13 full payments which reduces the interest due by one full payment that year.
Or commit to make one full extra payment each year. This has the same desired effect as the bi-weekly payments described above. That thirteenth payment can be applied solely to the principal.
A bit of advice before embarking on any of these strategies, verify with your lender that you can actually make principal payments and that it is within their policies.
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