Do You Need Lower Home Mortgage Payments?
Saving money on your home mortgage is simple. Whether your goal is to lower your monthly payment or to save money on the total cost of your home mortgage, mortgages offer you several ways to achieve your goal.
The first question is, do you want a lower monthly payment or a lower total payment? These goals are opposed. Because interest compounds, making a lower total payment means making a higher monthly payment, and making a lower monthly payment increases the amount of money you will eventually pay to your lender.
If you want a lower total payment, the solution is easy: Pay a little more each month. The extra money goes to pay off a little more of your principal, which slightly drops the amount of interest you pay next month, which means your next payment bites into your principal that much more deeply... and around and around, until within a few years you are paying markedly less interest than you were before. If you pay only $100 a month extra on a $200,000 home mortgage with a thirty year term, you will pay off the loan nine years early and save $72,000 in interest payments. If you cannot add money every month, add it when you can, or make one large extra payment a year. The impact on the amount you pay over the life of your loan will be powerful.
You can pay more each month without asking permission of your home mortgage lender. However, if you want to drop your monthly payment, you will need your lenders help to refinance. To lower your monthly payment when you refinance, you will need a lower interest rate (ideally two or more points less than your current rate), and you may need to add time to your term as well. Be cautious about lengthening the term of your home mortgage. Because of the way interest compounds, your monthly payments will not drop proportionately to the amount of time you add to the term. For example, a $100,000 home mortgage with a 5% interest rate and a 15 year term will cost $788 per month. Increasing the term to 30 years decreases the monthly payment by only $252 and more than doubles the total amount of interest you will pay. If your family is strapped financially, then this is a significant savings for your monthly budget, and may even enable you to keep your home. However, once you are less strapped, it makes good financial sense to pay a little extra each month to decrease the total sum you will owe on your mortgage.
Spending less on your home mortgage is simple, but it requires a tradeoff. If you want to save in the long term, you must spend in the present, and vice versa. Choose which one is best for your financial situation, and keep in mind the tradeoffs you make as you manage your home mortgage.
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