How to Reduce Interest Costs and Pay Off Your Mortgage Faster

Here is a money saving idea that is worth considering.   Do you have a fixed interest 30-year term mortgage as many people do?  Perhaps the low interest rate environment enticed you to refinance, but you were declined because of credit issues, high closing costs or the numbers just did not seem to make it worthwhile.  There may be another alternative for you that will save you interest and pay off your mortgage sooner.  By increasing your monthly mortgage payment by a modest amount you may be able to save a significant amount of interest and pay off your mortgage years sooner.  Here is an example.

Let’s say you purchased your home ten years ago and borrowed $100,000 using a fixed rate 30-year mortgage at 6.5 percent interest.  Your monthly payments are $632, and your current balance on the mortgage is $84,776.  You have been making payments for ten years and you have twenty years remaining on the mortgage.  You will pay an additional $66,920 in interest costs if you continue to make the same monthly payments over the remaining life of the mortgage.  By increasing your monthly payment by approximately $100 at the beginning of the eleventh year, you will pay off your mortgage five years earlier and save $18,768 in interest.

I refer to this strategy as downsizing your mortgage.  In the above example we downsized the mortgage from 30 years to 25 years.  You can choose the term that works best for you.  The shorter the term the more interest you will save, however, the monthly payment will be higher.  On a fixed term mortgage you are generally locked into the interest rate over the entire term, but in most cases you can accelerate the term.  In the above example the borrower will pay total interest of $127,544 over the 30-year term if he continues to pay the same monthly payment over the entire 30 years for a total payment of $227,544 on a $100,000 mortgage!

Be sure to check your mortgage document for any prepayment penalties as this would have to be factored into the calculation.  Increasing the monthly payment is considered a partial prepayment by most lenders.  The good news is that this technique does not involve closing costs, appraisals or new documents that would be required for a refinancing.  You may be able to increase your monthly payment online as some lending institutions offer this capability on their web sites.  If not, check with your lender prior to implementing this technique.  You must be current with your payments before initiating this. 

There is a mortgage calculator on Bankrate.com that is helpful for crunching the numbers.  Bottom line is that even if you do not qualify for a lower interest rate you may be able to significantly reduce your interest costs on your home mortgage.

Unsure How to Profit from the Low Interest Rate Environment?

Interest rates remain at unbelievably low levels and the Fed has stated that they may remain so until late in 2014.  Retirees and others who like to invest in bank CDs and other low risk investments hate this low interest rate environment, and rightly so since they are earning less than the rate of inflation on these investments.  But there are ways that you can profit from today’s low interest rates.

You may have already refinanced your mortgage and may be thinking about doing so again.  If you have not refinanced, now may be a great time to do so as rates on a fixed rate 30-year mortgage can still be had for around 4 percent and even lower on a 15-year term.  But there are some caveats.  Closing costs can be high, ranging from $2,000 - $3,500 and you will need good credit.  You need to do some number crunching, and if you are not comfortable doing this get some help.  One strategy that I like is refinancing from a 30-year to a 15-year term.  This can work well if you have built up some equity (have made eight to ten years of payments).  You can get a slightly lower rate on a 15-year term and often the monthly payments will be only slightly more than your current payments.  The benefit is the savings in interest costs from reducing the term to 15 years and the lower interest rate.  Also, be sure to calculate the time required to recover your closing costs.

Another way of benefiting from the lower interest rate environment is reducing or eliminating other indebtedness, specifically high interest credit card debt.  Credit card interest rates range from approximately 12 to 24 percent.  In my opinion no one should be paying this level of interest today, but many are.  Are you having deductions made from your pay checks for your 401(k) plan, credit union or other savings plan?  Consider stopping these deductions at least temporarily and using the money to pay down credit card debt.  One exception, to this suggestion is to continue 401(k) contributions if there are matching employer funds.  This is “free” money, but once you have received the maximum stop contributing and use the funds to pay down credit card indebtedness.

Take a look at any outstanding loans you may have with variable interest rates.  Most home equity credit lines have variable interest rates that are tied to published rates such as prime, Libor or the bank’s lending rate to its’ best customers.  Rates on bank home equity credit lines are likely to be quite low now (mine is currently 2.5 percent).   Look at your home equity credit line indebtedness with the goal of reducing it while rates are low.  It will be more difficult to pay down principal when interest rates begin climbing.  I am not sure that these low rates will last until 2014 given our country’s current level of debt and the Congress’ difficulty in cutting spending.