How to Save Thousands (And Years) on Your 30-Year Mortgage

Homeownership. Many of us dream of the day we send in our final mortgage payment and sit back in comfort knowing the roof over our head is finally paid off. What you may not realize is that you can make it a reality much faster and still save money in the process.

The “One Additional Payment” Difference

Did you know that making just one additional mortgage payment per year is one of the most effective ways to save and reach your goal of free and clear homeownership ahead of schedule?

Let’s assume you secured a 30-year fixed rate home mortgage loan for $300,000 at a 5.0% interest rate. The example below illustrates how just one extra payment per year could chip away at the principal (or the original amount you borrowed), not including the interest you will pay.

Standard mortgage payment strategy:

With a standard 30-year mortgage repayment plan without extra payments, you would see the following result:

• Original mortgage amount: $300,000
• Interest rate: 5.0%
• Term: 30 years
• Monthly payment: $1,610
• Total interest paid on your loan: $279,760
• Actual amount you will end up paying for your home: $579,760

As you can see from the example above, sending just your monthly mortgage payment will result in shelling out nearly as much in interest as you are for the home itself!

Make one extra payment per year:

Make just one additional payment per year on your mortgage, and you stand to reap significant benefits.

Let’s use the same basic loan parameters above, but break out your savings with an early repayment strategy:

• Original mortgage amount: $300,000
• Interest rate: 5.0%
• Term: 30 years
• Monthly payment: $1,610
• Additional payment per year: $1,610 (or an extra $135 per month)
• Total interest paid on your loan: $228,877
• Actual amount you will end up paying for your home: $528,877
• Total amount saved: $50,883
• Pay off date reduced by four years and eight months

Imagine the satisfaction that would come with owning your home outright nearly five years ahead of schedule and at a savings of over $50,000!

To discover how you could benefit from making additional mortgage payments, use our mortgage payoff calculator.

Reap the Financial Benefits of Refinancing Your Home

Sending additional payments toward your principal is not the only path to save money on your mortgage. Refinancing a home offers additional benefits that all homeowners should understand. Primarily, locking in a lower interest rate translates to direct savings as more of your monthly payment will now go toward the loan principal.

In addition to lowering the overall interest rate on your loan, refinancing presents an excellent opportunity to:

• Change your mortgage type: Refinancing is an ideal time to consider switching your adjustable rate mortgage to a fixed rate mortgage to keep your payment stable and immune from future rate increases.
• Pay off your loan faster: As your household income increases with career progression and new earning opportunities, you may consider converting your 30-year mortgage to a 15-year mortgage. With a 15-year repayment schedule, you stand to save big on overall interest charges because much more of your monthly payment will go toward repaying the principal of the loan.
• Finance home improvements: If you have equity, or a positive balance in your home’s value when compared to the amount you owe your financial institution, you may be able to use the refinancing process to get funds for renovation projects.

If you are considering refinancing your home, it pays to do your homework and run the numbers. You should be factoring in closing costs (credit check, attorney’s fees, application fees, home appraisal and inspection fees, and document preparation fees, etc); this will help you determine your break-even point (how long you would have to live in your house before you recoup these costs). Learn more here.

With an online mortgage refinancing calculator, you could set yourself on the path to early homeownership and save thousands of dollars in the process. 

Think of Your Home as a Long-Term Investment

Your home is so much more than just a place to hang your hat, raise your children and build lifelong memories. It is also one of the most significant investments you will make in your lifetime. Consider sending any unexpected income you receive throughout the year toward paying down the principal of your home loan.

This additional income could include:

• Tax refunds
• Holiday or performance-based bonuses from an employer
• Inheritance
• Insurance payouts
• Investment dividends and more

Ultimately, paying off a mortgage ahead of the standard 30-year schedule can be a reality for all homeowners. Consider making that extra annual payment toward your principal, keep an eye on interest rates, and set aside some of that bonus or tax refund to invest in your home. With these strategies, you could save thousands on your mortgage and make the American Dream your new reality.