by Dan Wolf
on Tuesday, February 11th, 2014 at 9:23am.
You like the standard 30-year fixed mortgage because of the lower monthly payments but blanch all the interest you're going to owe. A 15-year option boasts lower total interest but has higher monthly payments. There's a way to get the advantages of a the lower monthly obligation and the lower total interest: by prepaying your mortgage. This means paying what you owe earlier.
The easiest way to do this is by adding a little extra to your mortgage payment every month. You're not obligated to pay these additional funds, so if expenses are tight, you can skip the extra payment without penalty. But the extra money can save you thousands of dollars over the life of the loan.
For example, assume you have a $250,000 30-year fixed mortgage with an interest rate of 4.5 percent. This gives you a monthly payment of around $1,266. Your total interest, according to Bloomberg Personal Finance, will be oaver $107,000. Assume you add $500 per month to bring your payment to $1,766. Your total interest will be about $8,000, saving you almost $99,000. In addition, your loan term goes down by over 13 years.
But be careful because only some mortgages allow prepayment without any penalties or restrictions. Others assess a penalty based on how much you prepay. Some lenders only assess a penalty if you prepay the mortgage before a specified time, such as five years. The best way to find out is to ask the financial institution before you sign the mortgage papers.
If you want to know what other options you have in mortgages or want help in buying a home, please contact us.