Do You Need Lower Home Mortgage Payments?
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by: marciafreeman
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Saving money on your home mortgage is simple. Whether you want to save money over the entire term of the home mortgage or drop your monthly payments, mortgages offer several ways to make your life easier.
The first decision you have to make is, do you want to reduce your total payment or your monthly payment? These two numbers are opposed. Because interest compounds, making a lower total payment means making a higher monthly payment, and making a lower monthly payment increases the amount of money you will eventually pay to your lender.
If you want a lower total payment, the solution is easy: Pay a little more each month. The extra money goes to pay off a little more of your principal, which slightly drops the amount of interest you pay next month, which means your next payment bites into your principal that much more deeply... and around and around, until within a few years you are paying markedly less interest than you were before. Adding just $100 a month to the mortgage payments for a $200,000 home mortgage with a 30 year term can strip nine years off the duration of the loan and save you over $72,000 in interest payments. If adding money every month is out of your budget, add it when you find that you have a little extra left in the bank, or make a single extra large payment once a year. The results will be dramatic.
You do not need permission from your lender to pay extra on your home mortgage. On the other hand, if you want a lower monthly payment, you will need to refinance. To lower your monthly payment when you refinance, you will need a lower interest rate (ideally two or more points less than your current rate), and you may need to add time to your term as well. Be careful when negotiating a longer term for your home mortgage. Because of interest compounding, adding time to the term will not decrease the monthly payment proportionately. For example, a $100,000 home mortgage with a 5% interest rate and a 15 year term will cost $788 per month. Increasing the term to 30 years decreases the monthly payment by only $252 and more than doubles the total amount of interest you will pay. If your family is strapped financially, then this is a significant savings for your monthly budget, and may even enable you to keep your home. However, once you are less strapped, it makes good financial sense to pay a little extra each month to decrease the total sum you will owe on your mortgage.
Spending less on your home mortgage is simple, but it requires a tradeoff. Saving money in the present means spending more in the future, and spending more in the present means saving in the future. Decide which is best for your family, and be aware of the drawbacks as well as the benefits when you choose how to manage your home mortgage.
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