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Two Ways To Save Thousands of Dollars in Interest On Your Mortgage

In the article above I discussed being "mortgage debt free." However, if you are to carry a mortgage, here is a simple tip that could save you thousands of dollars on interest over time. First, a good rule of thumb is to make your total monthly housing payment doesn't consume more than 30 percent of your "take-home" pay. Second, with the potential of having interest rates continuing to climb, I would recommend a 30 year fixed rate mortgage. The exception of this might be if you know in advance that you are going to stay in a home for 2-5 years and then sell it. Then an adjustable might be more appropriate.

In this situation, 30-year mortgages often becomes profitable for the banks, than for you. If you purchase a home for $250,000, and you take out a 30-year mortgage at 5.0% interest rate, your mortgage payments over the 30 years will wind up totaling about $483,000! That is a $233,000 profit to the bank, when amortized over the 30- year period.

Here is a simple tip that could save you tens of thousands of dollars in interest payments: Switch to a biweekly payment plan. Take your 30-year mortgage you have, and instead of making the monthly payment the way you normally do, you split it down the middle and pay half every two weeks. Make sure your lender is applying these payments towards the loan as you make payments and not applying extra payments in a lump sum at end of year. Since you're making payments every other week, rather than once a month, you'll end up making one extra payment a year. By paying half of your monthly payment every two weeks, over the course of a year you will make 26 half-payments. This is the equivalent of 13 full payments, or one more payment than there are months in a year. Making more payments means paying your mortgage off sooner, which means paying less in interest. Depending on your interest rate, the average homeowner would save upwards of $50,000 over their mortgage just by following this payment program. Some banks charge a one-time fee to set up a bi-weekly payment plan.

The second option would be to make one extra "principle payment" a year towards your mortgage balance. The results of making an extra mortgage payment each year can be significant interest savings over time. If you make an extra payment to your principle annually, the term of the mortgage would be shortened from 30 years to a little over 24 years. It is imperative that your lender know that the extra payment is to be applied towards your principle. If not clarified, they will apply it towards interest. You should consult with your lender to find which mortgage best suits your short and long term goals.

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