You can reduce interest with just an additional monthly payment. (iStock)
The current environment of low interest rates has given everyone something to talk about besides COVID-19. Specifically, do I want to stick with my current mortgage or refinance? Is now the right time to buy a home? How much can I save by taking advantage of record low interest rates right now?
Whether you’re looking to refinance your current loan or buying a new home, the best place to start making mortgage decisions is to compare rates and lenders through an online tool like Credible.
REFINANCE YOUR MORTGAGE BEFORE RECORDING LOW RATES DISAPPEAR
Another important decision for potential homeowners (or those who want to change their bill payment structure) is to consider whether to pay the mortgage monthly (in 12 full payments per year) or biweekly (26 half payments per year).
Paying twice a week may seem too aggressive for your current budget, but the math behind this little “trick” makes it easier to pay off your mortgage faster, with minimal impact on your current monthly budget and lifestyle.
The secret bonus of making biweekly mortgage payments
Since there are 52 weeks in a year, 26 biweekly payments mean that homeowners who pay this way are making 13 monthly payments each year, instead of the standard 12. This amounts to just one additional mortgage payment per year, but this additional payment substantially shortens the life of the loan.
An owner with a $ 300,000 loan at a 4 percent interest rate makes an additional monthly payment each year. This shortens the payment of a standard 30-year mortgage by five years and saves more than $ 35,000 in interest over the life of the loan.
SHOULD YOU REFINANCE IN A 30 YEAR OR 15 YEAR MORTGAGE DURING CORONAVIRUSES?
Even if you don’t plan to stay in the house for 30 years, paying every two weeks generates more capital in the house, as you pay more and more of the capital. More equity in the home means that a homeowner can take out a home equity loan for large purchases or take advantage of capital to enter a larger home in the future.
If the interest rate on your current mortgage loan is higher than these averages, it may make sense to consider a mortgage refinance loan. You can visit Credible to compare rates and lenders in your area.
More benefits to pay every two weeks
- Shorten the term of the loan: Paying every two weeks means you get the lowest payments in a 30-year term, without the aggressive (and most expensive) monthly payment tied to a 15-year mortgage.
- Save money: The money saved by paying every two weeks may not seem like much in the months the third payment arrives, but over time the interest savings could finance a large purchase, such as a kitchen renovation, a college tuition payment, or a contribution toward The retirement.
- The additional payments go to the principal: Any additional mortgage payment reduces the principal of the loan, which means that each time you make an additional payment, you pay less interest and “own” a little more of your house.
For new homeowners who pay every two weeks from the start of the loan, they won’t even “feel” the additional payment coming out of their bank account each month. For current homeowners, it’s easy to set up a bi-weekly payment option, even if your lender doesn’t offer one.
Just take your monthly mortgage payment ($ 1,432 in the $ 300,000 example we used in this article) and divide by 12. With our example, this results in $ 119.33.
HOW TO GET THE BEST RATES FOR MORTGAGE REFINANCES
Each month, make an additional principal-only payment of $ 119.33, or automatically transfer this amount to a savings account and pay a full monthly payment at the end of the year. Be sure to mark any additional payments as principal only. This ensures that the money goes to the amount of your loan and not to the interest for the next month, which will not end up saving you anything during the life of the loan. Your lender should have the option to assign any additional principal payments online only.
A final tip: Paying every two weeks can have a big impact on the total amount you pay for your overall mortgage. Credible mortgage options are worth investigating. Before increasing your payments, make sure your lender does not charge you any prepayment penalty or hidden processing fees for the additional payment each month.
