Reducing Your Mortgage Cost and Paying Off Your Loan Early
Since you are borrowing a large sum of money over 30 years to buy a house you could otherwise not afford, it is expected that you pay for the use of the funds you borrow. That is why your bank charges you interest. However, over the life of the loan, the cost of your mortgage actually adds up to a lot of money. Using our example above, if you borrow $160,000 to buy a $200,000 house and pay it off in 30 years, you would have paid a total of $185,341.10 in interest (this amount is available in your amortization schedule). This means that would have paid more than $185,000 to borrow $160,000.
Now imagine you made an extra payment each month that is equivalent to an extra monthly payment a year. This will go a long way in significantly reducing your mortgage cost and paying off your loan early. So paying an extra $1000 each year would result in reducing your mortgage cost by $39,050.25 since you would reduce your total interest payment over the life of the loan by this amount. This will in turn result in you paying off your loan 6 years and 5 months early. You can use an online calculator to help you determine how much earlier you can pay off your loan by paying an extra amount each year, each month or even making a one-time only extra payment.
Please bear in mind that each mortgage company or bank has its policy on how extra payments are applied. Some automatically apply them to the principal while others will require that you send the payment to a separate address or specifically request that the payment be applied to your principal balance. Contact your bank or mortgage company when you plan on making extra mortgage payments.
By using these tips, you'll soon learn how to calculate monthly payments for a house payment on your own. Finally, if you are making these calculations because you are contemplating buying a piece of property, do not forget to account for real estate taxes and insurance. Depending on the type of mortgage you have, sometimes these could be included in your mortgage payment.
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