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Low Mortgage Rates Still Add Up to a Lot of Money Over Time

Do you know how much interest you are paying over the life of your mortgage? I’m guessing you didn’t pay much attention to that after going through the giant stack of paperwork to secure the mortgage in the first place. For most of us, we simply grit our teeth and just start signing.Mortgage interest 1

Well, somewhere in that stack of paperwork was your amortization schedule (fancy loan officer jargon). This is a form that shows all of your payments for the life of the loan and how much interest you would be paying over that time frame as well.

If you actually looked at it, you were probably a bit shocked. But that only lasted for a minute because, well, you wanted the house and there’s not really much you can do about it. And that’s true unless you’re one of the lucky few who can pay cash.

Even in today’s low-interest rate world, these numbers can be jaw-dropping. For example, let’s say you got a $300,000 30 year loan at 3.75%. Believe it or not, you would pay about $200,000 in interest over those thirty years. Pretty eye-opening if you’ve never actually looked at it before.

Just think if we were in more of a normal interest rate environment and your interest rate was 6.75%. You would have to pay about $400,000 in interest over 30 years!

Sidenote: The interest that you pay is tax deductible (for now) so you at least get a little relief that way.

Amortization Calculator 2

From Calculator.net

Now that I’ve shocked you enough, let’s get to the point of my blog and see how we can save some money on all this mortgage interest we are paying. First off, it’s imperative you always keep your eyes peeled on current interest rates to determine if a refinance would make sense.

Before you refinance though, you want to determine what your breakeven point is to ensure it makes sense (remember, you do have to pay closing costs). A great refinancing break-even calculator can be found at Bankrate.

Refinancing has become a regular thing for many people over the last few years as rates have continued to drop. Even though it can be a bit of painful process, I would give it serious consideration and run some numbers if you could save .50% or more.

Secondly, you can also look at refinancing to a shorter term loan to save money on interest. Granted, your monthly payment will most likely be more expensive, however, your actual interest rate should be less. Today, there are many companies offering 15-year loans at 2.75% APR.

Since I haven’t mentioned this yet and it’s absolutely vital, when looking at mortgage rates, the Annual Percentage Rate (APR) is by far the most important one. This rate includes every fee you would pay. When shopping around, this is the rate that should be used when comparing lenders (not the “interest rate”).

Getting back to our 15-year loan at 2.75% and comparing that to a 30-year loan at 3.75%, your monthly payment would go up by $645, but you would save $133,709 in interest over the life of the loan. That’s right you would save over $133,000!

If you have some extra wiggle room in your budget and could save upwards of .50% or more on your current 30-year loan, then I would give serious consideration to refinancing to a 10, 15, or 20-year term mortgage.

Finally, if refinancing to a lower rate or a shorter term is out of the question, then you may want to consider paying more of your mortgage on a monthly basis. Let’s look back at our example of the $300,000 30 year mortgage at 3.75%, but we increase our monthly payment by $200.

Financial Analysis Table

From MortgageCalculator.org

You can see by increasing your monthly payment by just $200, which most of us can find in our monthly budget, you would shave 6 years 2 months off your mortgage and save over $46,000 in interest. That’s pretty impressive from just paying a little more every month.

Compound interest can add up quickly. However, it’s important to know you do have options available when it comes to saving interest on your mortgage. The first two will require refinancing, which means lots of paperwork, but it’s well worth it when you see the amount of money you will be saving. However, for the third option, all you have to do is simply increase your payment on a monthly basis.

Don’t pay the banks more interest than you have to. Take the time to see what options you have and determine if one of these strategies might just be right for you. Happy saving!

This is a post from Clint Haynes, a Certified Financial Planner® in Lee’s Summit, MO. He is also founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.

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