If you own a home, you likely make it a point to save each month in order to make sure that you can make your monthly mortgage payment and you are never late. Though you save and save each month, it may feel like you’re never going to reach the day when your mortgage is paid off.
Reducing your mortgage term may seem appealing, but it also may seem impossible.
If you are looking to reduce your mortgage term, a quick tip is to round up your monthly mortgage payment.
Your mortgage term is simply the number of months (or years) you have left to fulfill your original Mortgage obligation when you bought your home. For example, a 30 year term means you have 30 years worth of payments (or 360 months).
A quick and easy way to shorten the 360 month mortgage term is to pay extra towards the Principal amount of the mortgage each month. You can do this by over-paying your minimum amount due. A good way to start is to round up your mortgage payment, if possible.
For example, let’s say you have a $200,000 loan amount. Your interest rate is 4% and your loan term is 30 years (360 months). For simplicity’s sake, we will only be using your Principal & Interest Payment and not focusing on any tax/escrow payments. If you pay the minimum Principal & Interest associated with this mortgage which is $954.83, it will take you the full 360 months or 30 years to pay off this mortgage.
By rounding up your mortgage payments and paying $1,000 instead of the $954.83 each month, the $45.17 more you are paying will come directly off the Principal amount you owe! By paying $45.17 more a month towards Principal, your term is automatically reduced from 360 months to 331 months. That’s 29 months or roughly 2.4 years off your term simply by rounding up your mortgage payments each month!
Wondering how much of an impact you could make by rounding up your monthly mortgage payments? Check out our Early Mortgage Payoff Calculator to see just how impactful rounding up your payments can be!
In addition to reducing your mortgage term, rounding up your monthly mortgage payments can also help you save money when it comes to mortgage insurance. If you are like many homebuyers and you put less than 20% down on your home purchase, you are required to pay PMI or private mortgage insurance. This insurance protects lenders in case you default on your loan and are unable to pay it back.
PMI does not last for the entirety of your home loan. It can typically be dropped when you’ve reached at least 20% equity in your home. But the sooner you reach that milestone, the sooner you can stop paying for mortgage insurance. This means rounding your payments up could save you even more additional money in the long run!
You can find more information about how to stop paying for mortgage insurance sooner here!
The bottom line is that paying extra towards Principal will reduce your total mortgage term and you will have your mortgage paid off earlier than if you were to make the minimum monthly payments. In this scenario, by paying off your mortgage term earlier, you would be saving $13,606.49 in interest! (Please note that in this example, we used $200,000 and a 4% rate, this was just to get a baseline on what the payment would look like with these figures. Actual rates vary based on qualifications and current market conditions.)
Interested in learning more about how you can reduce your mortgage term? Thinking about refinancing your home or purchasing a home and need some information about the different mortgage options that may be available to you? Contact the licensed mortgage originators at Maple Tree Funding today! Our team of experienced mortgage professionals would be glad to help you make your dream of homeownership a reality!
Give us a call at 518-782-1202 or complete our online contact form to get started today!
What’s Included In My Monthly Mortgage Payment – A quick refresher on what you’re paying for each month when you make your mortgage payment.
Early Mortgage Payoff Calculator – Find out just how much of a difference a small increase in your monthly mortgage payment can make.