A mortgage is likely one of the greatest debts most of us will incur in our lifetime. In fact, according to creditloan.com, “After 30 years of making payments, a homeowner with a $240,000 mortgage loan will have paid over $580,000 on his/her house.”
Of course such a statistic can be skewed based upon certain assumptions regarding interest rate levels, downpayment amount, and extra payments or the lack thereof.
After three years of payments on our own mortgage, we had cut an additional 30 months off our mortgage timeframe, saved ourselves nearly $3,000 in interest, and further reduced our future mortgage interest obligation by nearly $20,000.
Here are the three main steps that we took to help us pay down our mortgage faster.
A bigger downpayment
Putting a bigger downpayment on a home can help alleviate some of the strain of larger mortgage payments. It can decrease payment amounts, the amount of interest paid on the loan over time, as well as the cost of mortgage insurance.
We put nearly 40 percent down on our first home, and in the process, we reduced the size of our mortgage significantly. This also cut the amount that we’d have to pay in interest over the course of our loan by nearly $132,000.
15 versus 30-year mortgage
While some people might not like the higher monthly payments of a 15 versus a 30-year mortgage, the long-term benefits can be significant. Not only might a 15-year mortgage provide a better interest rate than a 30-year mortgage, but it can greatly reduce the amount of interest paid over time on the loan.
By taking on such a loan, we not only reduced the associated interest rate on the loan by nearly a percentage point, but due to the shortened payoff timeframe, cut our long-term amount paid on interest by about $110,000 compared to a 30-year payoff period.
Bi-weekly mortgage payment plan and/or additional self-made payments
Just because we put more down on our home and shortened our payoff time with a 15-year mortgage, this didn’t mean we were content to leave our mortgage payment efforts at that.
In addition to these steps, we also took part in a bi-weekly mortgage payment plan through our bank. We quickly realized though that this type of plan was little more than splitting up monthly payments to in effect add one additional full payment a year (26 bi-weekly payments as opposed to 12 monthly payments). Therefore, when we had any additional funds available, we made extra payments of our own.
This meant that after three years in our home, we had less than 10 years left on our 15-year mortgage, and we were well on our way to being mortgage-free. However, we were able to reach our goal of being mortgage free by selling our home of three years, pulling our equity, and downsizing to a home that we could afford outright.
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The author is not a licensed financial, real estate or mortgage professional. This article is for informational purposes only and does not constitute advice of any kind. Calculations have not been verified by a professional. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.