Let’s make the assumption you are taking out a 300,000 fixed rate mortgage 4% interest rate over a 30 year loan period. With a mortgage payment, you have two components to it, you have the principle and you have the interest. The bank calculates how much you must pay every month over a 30 year period so at the end of it you owe zero. The monthly payment does not change, even if you’re going to pay more each month to lower the principle, your payment is going to stay the same. What is going to change is the amount you pay every month that goes to principal and the amount that goes to interest.
Using our calculation, 4% of 300,000 is 12,000 annually, dividing that by 12 (for months in the year) is 1,000 interest in the first month. That is the most that you are ever going to owe. Your payment in this scenario is $1,432, so 432 is going to go toward your principal to reduce the amount that you owe. Then they do the same calculation all the way through, for month two, you just paid down 432. They’ll take this new outstanding balance that you owe (299, 568) and multiply that by 4%, divided by 12 and $998 is your interest due month 2. The amount above that is going to reduce the principle. The amount you pay each month is going to stay the same, but the amount you owe to the principal is going to go up a little each time and the amount to owe to the interest is going to go down a little each time.
So if you decide you don't want to owe the bank this much interest over the years and you want to pay less interest. All you need to do is owe them less money. Instead of a 30 year mortgage you decide to go with a 15 year mortgage, you would cut the amount of interest you would pay substantially. However, your monthly payment would be much higher than with the 30 year.
Let’s say you put an extra 3,000 yearly towards the 30 year mortgage, you would save around $60k in interest. Plus you would be done with the mortgage in 22 years. Or say, you think you could pay an extra 400 every month, you would save around $80k in interest and be done in about 20 years.
If you’re interesting in paying off your mortgage faster and you’re focused on doing it, here are 4 tips to help you get there:
Pay more money towards it - Just make random extra principal payments towards it. If you’ve got extra money laying around, go into the bank and throw some money at it. Make sure to say it's a principal payment.
Do Bi-weekly Payments - Instead of paying 12 monthly payments, you’re paying 24 bi-weekly payments, which is the equivalence of 13 full payments.
Make payments as if it was a 15 year mortgage - This way it’s fine if you take out a 30 year mortgage, this gives you the flexibility, so if you don’t have the money one month you can still make the original payment. But if you do have the money, pay it and it will go that much faster.
Refinance to a lower interest rate - Interest rates are quite low right now, so refinancing might make sense to you. Just make sure you can save enough on the interest rates to make it worthwhile.
Unfortunately there isn’t an easy way or easy fix to getting rid of your mortgage instantly. The best thing to do is keep putting money into the principal mortgage.
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