Save Big! 15-Year v. 30-Year Mortgage Loan

Thinking about refinancing or getting a new loan?

Check out the infographic, prepared by California Association of Realtors to help those refinancing or contemplating a new mortgage.

It shows how much you can save in life-of-the loan interest charges if you can afford a 15-year rather than a 30-year mortgage.

Save Big Big

How To Pay Off Your Mortgage Faster

These days with 30% of those with mortgages under water and foreclosures coming left and right, it’s easy to forget that 50% of all American homes have paid off mortgages. That’s right–50%. Though some may quibble that means huge amounts of untapped equity that could be used elsewhere more productively, for the average homeowner paying off the mortgage means peace of mind, safety and security in an unsafe and insecure economy.

Pay Off The Mortage Faster

Paying off the mortgage is a good thing, but how can a homeowners get it done faster than the 15 or 30 years of payments outlined in their mortgage documents? Many routes to mortgage-free living exist, most almost painless.

One simple method involves refinancing the property. Despite the millions suffering from plunging home values, others still have plenty of equity. If you estimate that you have at least 20% equity in your home, refinancing is a good options. It makes sense even if your present rate is 5% or 6% as current rates are hovering closer to 4%. A good rule of thumb is–if you can save 1% in mortgage interest than it is worthwhile to refinance. And, if you can afford it, it might make greater sense to refi into a 15-year mortgage which will save you more than half the interest costs of a 30-year mortgage.

Another simple method of paying off your mortgage faster is to make bi-weekly payments. That way if your payment on, say, a $300,000 mortgage at 5% over 30 years is $1610 per month, you could break this up into two payments a month of $805. Because a year has 26 weeks, paying biweekly will have you making 13 payments and by the end of the year, you will have made an extra payment. You could also, of course, make a whole extra payment any time during the year.  Or you could divide one payment of $1610 by 12 and pay an extra $134 per payment. The savings can be substantial. In the above example, according to this nifty calculator from bankrate.com, a homeowner could shave 5 years off his 30-year loan and over $50,000 in interest charges. Not bad.

Do Banks Charge A Fee?

Some banks are offering this biweekly mortgage payments as a service with a setup fee of several hundred dollars. Citibank, for instance, charges $375 for the “convenience” of taking this money out of your checking account and then dings you again when you make the payment. Most banks, including Citibank, will allow you to make extra payments for free.¬† It is possible to make this payment yourself, but it pays to check with the bank first as your bank may just deduct the payment from principal and then still expect the regular payment.

High-Interest Credit Cards First

Making this extra payment can save the homeowner in this example, for instance, 5% so it does not make sense to put the money into the mortgage if you have outstanding balances on credit cards charging interest rates of 6% or above and certainly not the 29% charged by some cards. Pay off those high-interest cards first and then start working on the mortgage.