3 Ways to Save Thousands in Mortgage Interest

Interest rates card next to calculator

It’s common knowledge that you’re going to pay interest when borrowing money. But, did you know there are ways to pay off mortgage interest sooner? In this article, we discuss three of the most popular ways to accomplish greater long-term and overall savings.

1. Bi-weekly mortgage payments

Making a payment every two weeks adds one all-principal payment to your mortgage each year. Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year. The extra payment you make each year is applied to your principal, so your interest also decreases with each reduction in principal. Plus, the more principal you pay, the quicker you build equity in your house. The conventional logic is that increasing the frequency of the payments doesn't allow interest to build up and over the course of a 30- or 15-year mortgage that can equal years eliminated from your loan. Just be sure your mortgage servicer allows you to make bi-weekly payments and it doesn’t add fees to your statement for making them. Those fees can add up, resulting in little to no benefit to you. Along that same line, be sure to ask if your bi-weekly payment is applied upon receipt, or if it’s held until the end of the month (or even the end of the year). The true benefit of bi-weekly payments is when that amount is applied upon receipt.

2. Extra mortgage payments

Even if you don’t set up a bi-weekly plan with your servicer, you can accomplish the same goal of paying down your loan faster by making one extra mortgage payment a year on your own; or dividing your monthly payment by 12 and adding that amount to your payment every month. The former, and somewhat easier to commit to, option allows you to choose if and when you pay extra toward your mortgage loan. Say you receive a large tax refund or performance bonus from work — it may be worth putting some (or most) of it toward your loan principal. This allows you to take years of interest payments off your loan, depending on how much you’re able to spend. The second option of putting more money toward your monthly payment can also result in incredible savings. Let’s consider this example. Say your original loan amount is $400,000. You’ve committed to a 30-year conventional loan at a 4% interest rate. Not considering escrow, your monthly payment is around $1,909.66. But if you can put an extra $100 toward your monthly amount, you may be looking at $30,318.82 in total savings. This would help you pay your loan off two years and nine months faster! Curious how an extra payment (or two) each year can help your budget? Try our extra mortgage payment calculator.

3. Streamline refinance

If you have a government-backed loan, you may want to look at a streamline refinance. A streamline refinance allows you to take advantage of a lower interest rate and lower monthly payment. Plus, there are lenders who will work with you to lower your rate without resetting your term. At American Financing, for example, there are custom loan options that can be written into 8, 14, 19-year terms — whatever is needed. Because if you’ve been paying for 6 years, you should be able to refinance to a 24-year loan. It’s simple. It’s an easy way to save, and it’s customized for you. If you’re in a conventional loan, you have a similar option called a rate-and-term mortgage refinance. You’re able to change your mortgage rate, your loan term, or both. And since you aren’t cashing out, you will likely receive a lower, more competitive interest rate. And as mentioned above, when working with American Financing, you’ll be provided with custom loan options that don’t reset your loan term. It’s your term, your way.

Key takeaways

  • Remember, you're charged interest based on your outstanding principal. The sooner you can pay down your principal, the less interest you’ll be charged.
  • Though it’s often a valuable cost savings’ option, refinancing is not for everyone. Be sure to ask yourself a few questions about what you hope to accomplish before you make any significant loan changes.
  • Working with a salary-based mortgage consultant allows you to see all options available. You’re not pressured into a specific loan program that may not fit your financial goals.