I’ve found myself listening to Dave Ramsey (financial author & radio host) quite a bit lately and fantasizing about owning an house with no mortgage payment. Although I know that it can be done and it’s one of my goals, it’s sometimes hard to see the possibility.
I offer these two ideas to help you get yourself one step closer and reduce the amount of time until you can say “I own this house debt free”.
1. Switch from an Monthly payment to bi-weekly payments.
A 30 year conventional loan of $250,000 at an interest rate of 4% has an monthly payment of $1193.54 and lifetime interest amount of $179,673.77.
By making bi-weekly payments of $596.77 on that same loan your pay-off will come four years sooner with an savings of $29,223.37 in interest over the life of the loan.
By paying one half of your currently monthly payment 26 times a year, you are effectively making one extra payment per year. The more frequent reduction of the principal reduces the payoff time to 26 years and the additional savings in the total amount of interest is equal to more than 2 years of payments!
2. Move into an 15 year loan.
Typically the rate on an 15 year loan is about an half a precent less than an 30 year loan. One recent quote I saw was for an 30 year loan with an APR of 3.6% or 15 years at 2.9%.
At those rates, an 30 year loan of $250,000 would be $1136.61 monthly and the 15 year loan $1714.46. Yes, the monthly payment is higher but definitely not double. And while you are cutting the time in half don’t forget to notice the total interst paid over the life of the loan drops from $134,926.92 to $52,335.90. So, in this scenario, paying an additional $577.85 per month “saves” you $82591.02 in interest.
Before you start panicking about how you will keep up with your freinds extravangant lifestyles while you are securing your future, remember this.. They like supporting you in reaching your goals and staying in for “game night” now and then.
Disclaimer- I am not a lender, I am just a guy who Googled “bi-weekly mortgage payment” and typed in some numbers to give you some food for thought. Your results may vary.
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