- Christian Bishop CFP®, EA
Managing that Mortgage Payoff
It was a shocking realization. Buying my first home, signing the mortgage documents, and realizing how much interest I was going to pay over the term of the note. With a 30 year mortgage it can be a real eye opener to the world of finance and how interest costs can really add up. For example, a typical 30 year mortgage with $250,000 borrowed at 4% may cost you over $ 180,000 in interest over the term. While there are other shorter terms, such as 15 year mortgages that may be a better option, what do you do if you already have a 30 year note? Here are some money saving strategies and options that can potentially save you thousands and knock years off of your term.
1. It is possible to save tens of thousands of dollars over the course of your mortgage by paying a little extra each month. For example, if you have a 30 year mortgage that you financed 5 years ago for $270,000 with a 4% interest rate, you could knock off almost 3 years and save about $18,000 in interest just by paying an extra $100 per month. Taking it a step further and paying an extra $200 per month would save about $32,000 in interest and pay off your mortgage about 5 years early. Check out this calculator to see how much you potentially could save with your specific details.
2. Autopay. Most banks and finance companies will allow you to set up automatic payments. By including an additional principal payment in the automatic monthly calculation, you are more likely to stick with it. If you send in your monthly payment with a check, be diligent to include the additional principal payment each month. However, by having the sum automatically deducted from your checking account, not only are you more likely to make the extra payment each month, but you are also not likely to make a late payment because you missed the due date.
3. Put your tax refund to work for you and make a significant dent in your interest paid. If you get a refund check when you file your income taxes, use a portion to make an extra principal payment on your mortgage. While paying an extra amount each month has its advantages, not everyone can afford an extra additional monthly amount. Since the tax refund is likely “found money” why not use it to pay down your mortgage. For example, if you are 5 years into a 30 year mortgage at 4%, a one time extra payment of $2,400 can knock off 5 months of payments and save about $4,000 in interest. If you did the same thing each year, you could save over $32,000 in interest and payoff your mortgage about 5 years early.
While everyone’s situation is unique, some basic concepts are universal such as paying down debt. It is a good thing. Paying a little extra each month or once per year in a lump sum, can potentially save a large sum of interest and reduce your monthly cash flow going out each month much sooner than if you had stuck to the original repayment plan. In some cases, this can help you possibly retire sooner and/or have more money in retirement. Complex tax rules, potential investment alternatives and overall planning considerations must be examined prior to any mortgage repayment acceleration. Speaking to a Certified Financial Planner™ Professional may be of help.
This material is intended for educational purposes only. The examples are hypothetical and for illustrative purposes. Actual results will vary. Please contact your financial professional for more information specific to your situation.
Christian Bishop CFP®, EA