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.