Buying Down Your Interest Rate
A lower interest rate saves you money on your monthly mortgage payment, and also reduces the amount of interest you will have to pay over time. For a $200,000 loan with a 30-year term, a difference of 0.25% could save you an extra $30 a month and over $10,457 in interest total!
Increasing the Frequency of Payments
The most gratifying way to bring down the principal balance on your mortgage and shorten your loan term is to switch from monthly to accelerated bi-weekly payments. Here’s what that looks like.
In the above example of a $200,000 mortgage, your monthly payments would be $983.88. If you simply switch to a bi-weekly arrangement, your payment will come out to $983.88 × 12 months/26 weeks = $454.10. This would would save you a little in interest, but not as much as if you made accelerated payments.
Accelerated bi-weekly payments are calculated like this: $983.88 × 12 months/24 weeks = $491.94. Your payment is slightly higher, covering the equivalent of a 13th monthly mortgage installment every year. Over time, that makes a substantial difference. In this example, it saves $15,393 in interest and shrinks the amortization period by almost three years.
Making Lump Sum Payments
Making lump-sum payments of just $2,000 per year on a $300,000 mortgage would save you $17,774 in interest. In addition, it would allow you to pay off your mortgage six years sooner, assuming a five-year fixed-rate mortgage at 2.99% interest rate and a 25-year amortization.