With the arrival of spring comes the most important period when the purchase and sale of property increases. The months of March, April, May and June are the busiest in the housing market.
One of the most important variables in buying and selling property is the mortgage loan that is used to acquire the property. Today we will discuss some strategies to pay off our mortgage faster, this will save thousands of dollars in interest and these savings can be used for the education of our children, for our retirement, or for the purchase of a second property.
First let’s make a summary of the most important variables in a mortgage:
- The payback period is the time we have to pay our total mortgage.
- The term, this is the term by which our mortgage will have the same interest, same payments, and other variables. When the term ends we have to renegotiate the interest and the different variables.
- Fixed or variable mortgages, fixed mortgage maintains a fixed rate for the term chosen. A variable mortgage, the interest rate can vary depending on changes of interest rates.
- Open or closed mortgages, open mortgages have the option to pay back the loan at any time without a penalty, closed mortgage has a few options, such as making double payments per month, and up to 15% of annual payments, but if we end mortgage before the term chosen have to pay a penalty, closed mortgages are the most common, and generally open mortgage has a higher interest.To demonstrate the different strategies, we will use a numerical example where we can see how to pay our mortgage on a open term, and how to save thousands of dollars in interest:
First, we can change our monthly payments biweekly payments. In the case of a mortgage of $ 250,000, our monthly payments of principal + interest would be $ 1,181.83, end up paying the mortgage in 25 years, and would pay $ 104,549.56 in interest. If we change payment every two weeks, our payments would be $ 590.62, and we would pay our mortgage in 22 years and three months, saving $ 13,218 in interest.
Second, we can make extra payments. These extra payments will go directly to the mortgage principal. If we make an extra payment of $ 1,000 per year (making payments biweekly principle + interest), we will pay the mortgage in 21 years and we will save a total of $ 21,141 in interest.
Third, we increased the principle + interest payment every two weeks (we paid an extra $ 1,000 per year). If we increase our payments by 2%, $ 12 more every two weeks, we will pay the mortgage in 18 years and we will save a total of $ 31,569 in interest.
I enclose a link where we can make the same calculations, changing the variables of our existing mortgage:
In short, some of the options to pay before your mortgage and save on interest would be: make payments on your principle + interest more frequently, making extra payments per year goes directly to the loan principle and decreases the balance + interest.