It’s essential to understand the ins and outs of mortgages, including how to avoid paying interest on your mortgage.
Mortgages are a fact of life for most people.
For many, it’s their single largest investment.
In this article, we’ll discuss some tips on how to do that.
How does mortgage interest work?
A mortgage is a loan that is used to purchase a piece of property, such as a house.
When you take out a mortgage, the lender will charge you interest on the loan.
The amount of interest you pay will depend on the loan amount, the term of the loan, and the interest rate.
The interest rate is the percentage of the loan that you will pay in interest. For example, if you take out a $100,000 loan with a 5% interest rate, you will pay $5,000 in interest over the life of the loan.
Mortgage interest is paid monthly, along with your payment towards the loan’s principal.
The principal is the amount of money that you borrowed.
In this example, your monthly payment would be $500 towards the principal and $416.67 towards the interest.
Over time, more of your payments will go towards paying off the principal as the balance of your loan decreases.
The time it takes to pay off a mortgage is called the term.
Mortgage terms can range from five years to 30 years.
A shorter term means higher monthly payments, but you will pay less interest overall.
A longer-term means lower monthly payments, but you will pay more interest overall.
You can choose how long you would like your term to be when you apply for a mortgage.
Example of mortgage interest over time
When you take out a mortgage, you typically agree to pay back the loan, plus interest, over a certain period of time.
The amount of interest you pay can depend on several factors, including the size of your loan, the length of your loan term, and the interest rate.
Interest rates can fluctuate, so your monthly mortgage payment may also change.
For example, let’s say you take out a $250,000 mortgage with an interest rate of 4%.
If your loan term is 30 years, your monthly mortgage payment would be about $1,013.
But if interest rates rise to 5%, your monthly payment would increase to $1,115.
And if interest rates rise again to 6%, your monthly payment would jump to $1,228.
As you can see, even a small change in interest rates can have a big impact on your monthly payments.
Therefore, it’s important to be aware of how changes in interest rates may affect your mortgage payments.
If you want to test around your mortgage payments, you can use this online calculator.
5 Ways to avoid paying interest on your mortgage
If you’re like most people, you have a mortgage.
And, if you’re like most people, you don’t want to pay interest on your mortgage.
Here are five tips to help reduce the interest you pay on your mortgage each month.
1) Pay your mortgage bi-weekly instead of monthly
Most people choose to pay their mortgage monthly, but there are advantages to paying bi-weekly.
When you make bi-weekly payments, you make one extra payment per year.
This may not seem like much, but it can save you a significant amount of money in interest over the life of your loan.
This is because the extra payments reduce the principal balance of your loan.
As a result, less interest accrues over time, and you pay less overall.
Another advantage of bi-weekly payments is that they can help you build home equity more quickly.
This can be helpful if you ever need to refinance or sell your home, as you will have more equity to work with.
Overall, paying your mortgage bi-weekly can be a smart financial move that can save you money in the long run.
2) Make extra payments each year
If you’re looking to avoid paying interest on your mortgage, making extra payments each year is a great way to do it.
By making even just a few extra payments throughout the year, you can drastically reduce the amount of interest you end up paying over the life of your loan.
Depending on the size of your mortgage and the interest rate you’re paying, making just a few extra payments each year could save you thousands of dollars in interest charges.
And best of all, those savings are all yours – unlike money paid in interest, which goes straight to your lender.
So if you’re looking to keep more of your hard-earned money in your pocket, make extra mortgage payments each year.
It’s a savvy move that will pay off for years to come.
|
Payment Method |
Pay Off Loan In… | Total Interest Paid | Total Interest Saved |
|---|---|---|---|
|
Minimum payment |
30 years |
$164,810 |
$0 |
|
$100 extra monthly |
25 years |
$133,066 |
$31,744 |
|
$200 extra monthly |
21 years and 6 months |
$112,056 |
$52,753 |
|
$500 extra monthly |
15 years and 3 months |
$76,698 |
$88,111 |
|
$1,000 extra monthly |
10 years and 5 months |
$50,679 |
$114,131 |
3) Refinance your mortgage if current interest rates are lower than what you’re currently paying
If you’re currently paying interest on your mortgage, it may be a good idea to refinance if the current interest rates are lower.
Refinancing allows you to take advantage of the lower interest rates and avoid paying interest on your mortgage.
In addition, by refinancing, you may be able to reduce your monthly payments.
Before you decide to refinance, it’s important to compare the costs of refinancing with the savings you’ll achieve.
It would help if you also considered the length of time you plan to stay in your home.
Refinancing may not be the best option if you don’t plan on staying in your home for a long time.
4) Get a 15-year fixed rate mortgage instead of a 30-year fixed rate mortgage
If you’re looking to minimize the interest you’ll pay on your mortgage, opting for a 15-year fixed-rate mortgage instead of a 30-year fixed-rate mortgage is smart.
With a 15-year mortgage, you’ll typically have a lower interest rate than with a 30-year mortgage, which means you’ll pay less interest over the life of your loan.
In addition, with a 15-year mortgage, you’ll build equity in your home more quickly than with a 30-year mortgage, giving you more financial security in the long run.
Of course, with a 15-year mortgage, you’ll also have higher monthly payments than with a 30-year mortgage.
But if you can swing the higher payments, opting for a 15-year fixed-rate mortgage is a wise financial decision.
|
Home Price |
Loan Amount | 15-Year Monthly Payment at 4% | 30-Year Monthly Payment at 4.5% |
|---|---|---|---|
|
$200,000 |
$160,000 |
$1,184 |
$811 |
|
$250,000 |
$200,000 |
$1,479 |
$1,013 |
|
$300,000 |
$240,000 |
$1,775 |
$1,216 |
|
$400,000 |
$320,000 |
$2,367 |
$1,621 |
|
$500,000 |
$400,000 |
$2,959 |
$2,027 |
5) Drop Private Mortgage Insurance (PMI)
Private mortgage insurance, or PMI, is a type of insurance that lenders require when a borrower makes a down payment of less than 20% on a home.
This insurance protects the lender if the borrower defaults on the loan.
PMI can add hundreds of dollars to your monthly mortgage payments, and it generally remains in place until you have paid down at least 20% of the loan principal.
Fortunately, you can get rid of PMI once you have reached this threshold.
Doing so will lower your monthly payments and save you money over the life of the loan.
To drop PMI, you must submit a request to your lender and provide evidence that you have reached the 20% mark.
Once your request is approved, you can cancel your PMI and enjoy the savings.
Does refinancing lower your interest payments?
Refinancing your mortgage can be a great way to save money on your monthly payments, but it’s important to understand how it works before you commit.
You’re essentially taking out a new loan to replace your existing mortgage when you refinance.
The new loan will have different terms, including a lower interest rate.
This can lead to lower monthly payments, but it’s not guaranteed.
To qualify for a lower interest rate, you’ll generally need good home credit and equity.
Additionally, closing costs can sometimes outweigh the savings from a lower interest rate, so it’s essential to compare offers from multiple lenders before making a decision.
Ultimately, refinancing can be a great way to save money, but doing your research first is important.
Should you pay off your mortgage early?
While there are some potential benefits to paying off your mortgage early, there are also some drawbacks to consider.
One potential benefit is that you can save on interest costs over the life of the loan.
You will pay less in total interest charges by paying down the principal balance more quickly.
This can free up more money each month which can be used for other financial goals.
Another potential benefit is that you will have more equity in your home sooner.
This can be helpful if you need to sell or refinance your home in the future.
There are also some potential drawbacks to paying off your mortgage early.
One is that you may miss out on other investment opportunities.
The money you use to pay down your mortgage could be used to invest in other assets such as stocks or real estate.
These investments may potentially provide higher returns than simply paying down your mortgage.
Another drawback is that you may incur penalties from your lender if you pay off your mortgage before the end of the term.
Be sure to check with your lender to see if there are any prepayment penalties before making extra payments on your mortgage.
Overall, whether or not you should pay off your mortgage early depends on your financial situation and goals.
How to avoid paying interest on your mortgage? – Conclusion
Mortgages are quite popular in the majority of people’s lives.
We must figure out how to make the most of them.
Hopefully, this article has helped you understand how to avoid paying interest on your mortgage, how refinancing can save you money, and whether or not you should pay off your mortgage early.
Now that you understand these things, you can make the best decision for your financial situation.
