Save Thousands On Your Mortgage
by David Berky
Interest on the average home mortgage will cost the homeowner nearly TWO TIMES
the cost of the home.
If you were to purchase a $150,000 home with a $120,000 mortgage (80%), and you
paid an interest rate of 9% for 30 years, you will have paid over $227,500 just
in interest (in addition to the original $120,000). That's nearly two times the
cost of the home!
A credit card debt of $7000 (now the average) at 18% being paid at the rate of
$20 principal plus interest each month will take over 29 YEARS to pay off,
almost as long as a home mortgage. Interest charged on this credit card debt
will top $18,400, more than 2.6 TIMES the original debt!
If you work for a living, you know that when you are not working, you are not
getting paid. But interest never gets sick, never takes a vacation and never
sleeps. It is working against you 24 hours a day, seven days a week, each and
every day of the year.
So what can you do?
You may not be able to pay off your debts or mortgage now. You may not have
enough equity in your home for a loan. You may not be able to afford the
refinancing costs or home equity loan costs. You may not be able to lower your
credit card interest rates.
But you can make additional or extra payments.
So how does making an extra payment help lower your interest charges? Is it
going to make next month's bill smaller? You can't scrape together too much for
an extra payment so how is just $10 going to help when you owe tens of
The secret is in making early and consistent extra payments. For example, on the
home mortgage shown above, if you pay an additional $100 each month you will
save over $82,000 in interest payments. Not only that, but you will also have
your home paid off nine years and two months earlier. You knock nearly 10 years
off your mortgage just by paying an extra $100 a month.
How does that work?
Well, that $100 extra you pay the first month would have cost you about $270 in
interest to borrow for 30 years. Since you have paid it already, you can reduce
your last mortgage payment by $270. The next month's extra payment will reduce
your last mortgage payment by $268. Each month as you pay that extra $100, your
final mortgage payment will be reduced until you won't need to make a final
payment, then the second to last payment, then third to last and so forth. Soon
you will have shaved years and thousands of dollars in interest charges off your
That's great, but maybe you can't spare $100 each month. How about $50, $25, or
even $10? An additional payment of $50 each month will save you five years and
seven months and about $52,000 dollars. $25 each month will cut your time by
three years and three months saving you about $30,000. Just $10 a month will
reduce your time by one year and three months and save you over $13,500.
Every little bit helps. Some months you may only be able to add $10 to your
payment; some months you may be able to add $200. And this applies to interest
on credit card payments or any other kind of debt repayment. Paying down as much
of the principal (or amount you owe) each month will help reduce the interest
you are charged and the length of time it takes to pay off the debt.
So why don't the credit card companies charge you more of the principal each
How would you like to be making 18% on an investment? Wouldn't you want this
investment to last as long as possible? Of course! So do the credit card
companies. They are happy for you to pay off your balance, but even more excited
for you to keep paying them that 18% interest.
There are some other interest tips and tricks.
- One trick your mortgage company may have played on you is to include a
prepayment penalty in your mortgage. If you try to pay off your mortgage early
they may actually charge you for doing so. Or they may only apply part of your
payment to the principal and take the rest as a "service charge."
- Make sure when you make an additional payment that you send a check separate
from your monthly mortgage payment with instructions that the amount is to be
applied toward the principal of your loan. Otherwise they may just apply it
towards next month's payment and still charge you the interest.
- Generally you will not have this problem with credit card companies. But watch
out for late payments or going over your credit limit. They may then use these
"rule infractions" as cause to raise your rate to over 25%!
- If you are looking to refinance your mortgage, look for a mortgage that lets
you pay on a bi-weekly basis. Since many people receive a bi-weekly paycheck
this also makes it easier to budget your money. If you are paying every two
weeks you will make an additional monthly payment each year (26 bi-weekly
payments vs. 12 monthly payments). Also, because you are paying the principal
down every two weeks rather than every month your interest charges will be
You CAN take control of your interest charges. Make those extra monthly
payments. The feeling of being debt-free will far outweigh the temporary
pleasure of that burger, movie or new DVD-player.
David Berky is president of Simple Joe, Inc. a marketing company that sells
simple software under the brand name of Simple Joe. One of Simple Joe's best
selling products is Simple Joe's Money Tools - a collection of 14 personal
finance and investment calculators. This article may be freely distributed so
long as the copyright, author's information and an active link (where possible)