What Is Mortgage Amortization
Mortgage amortization is a term that refers to the length of time it would take to pay down the principal balance of a home loan with regular monthly payments. This is based on a period of time known as the amortization period. So a mortgage with a 30-year amortization period would take that long to pay off the principal balance.
How To Pay Down Your Principal
Buying a home is an exciting experience. Theres nothing like receiving the keys to your home, especially after youve worked so hard to save for a down paymentand qualify for a loan. But there are many responsibilities that come along with owning a home. At the top of this list is your monthly mortgage payment.
Like many homeowners, your mortgage payment can be your largest monthly expense. The thought of paying hundreds or thousands of dollars a month for decades can be overwhelming. Paying your mortgage principal faster can reduce the amount of interest you pay and also help you pay your loan off sooner.
Tip #0: Shop Around For The Best Interest Rates
The first tip is to shop around for the best interest rates. This may seem like an obvious one, but youd be surprised at how many people simply accept the first offer they receive from their bank or mortgage lender. By shopping around and comparing rates from different lenders, you could potentially save thousands of dollars over the life of your loan.
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Find Cheaper Homeowners Insurance
Your homeowners insurance might be part of your monthly payment, which is deposited into your escrow account that the lender uses to pay your insurance, and perhaps your property taxes. If this is the case, shopping around for cheaper homeowners insurance could reduce your monthly mortgage costs.
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Make Biweekly Mortgage Payments
If youre paid every other week, paying half your mortgage payment each time your check is deposited might make sense for your budget.
Not that this will lower your monthly payment, but it will do three other beneficial things:
- Each bite out of your budget will be smaller.
- You will shorten the life of your loan.
- You will build equity faster.
The magic is in the two extra payments you send , creating the equivalent of a 13th monthly payment, the last going entirely toward principle.
If this is your forever house, making biweekly payments on a 30-year fixed-rate mortgage will shrink your loan between five to eight years, saving tens of thousands of dollars in interest.
If its a house youll be leaving after a few years, a biweekly plan assuming it doesnt over-stress your budget will mean you recoup more equity when you sell.
You can enter into a biweekly payment plan on your own you dont need the lenders cooperation, or to enter into an expressed plan . Set up an autopay command for your checking account, and away you go although you may need to remind the lender about the last two payments of the year are to be applied against principle.
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Tip #0: Make A Large Down Payment
If youre serious about getting a lower interest rate on your mortgage, then you need to make a large down payment. The larger the down payment, the lower your interest rate will be. This is because lenders view borrowers with larger down payments as being less of a risk. So, if you have the cash available, make sure to put down as much money as possible!
Shop Around For Cheaper Homeowners Insurance
Its smart to periodically look for better deals on homeowners insurance. You can call around to get quotes from a few insurers, and if its worthwhile, you can make the switch. Just be sure youre reviewing quotes for comparable, adequate home insurance coverage.
Even if you want to stay with your current home insurance carrier, you may be able to reduce your bill. For example, most insurance providers offer discounts for bundling two or more of your policies, said Green. For example, consider switching your car insurance to the same company that provides your home insurance.
Another option to consider is raising your deductible. For example, moving from a $500 to $1,000 deductible could reduce your premium.
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Learn Where Your Credit Stands Before Applying For A Mortgage
It’s good practice to find out what your credit looks like before applying for a mortgage. You can check your credit score for free with Experian you can also opt to get the scores that mortgage lenders use. If your credit score is already above 700, you may not need to make many improvements before applying for a mortgage preapproval.
But, if you suspect your credit score is too low to qualify for a mortgage with lower interest rates, consider getting a copy of your credit report from Experian to spot potential credit issues. If you find any information you believe to be erroneous or fraudulent, immediately dispute the information with the three major credit bureaus, Experian, TransUnion and Equifax.
Refinance To A Longer Term
Gaining more time to repay is another popular reason for refinancing. If you’ve made payments on a 30-year loan for a few years, for example, you could refinance the remainder back out to 30 years. This would likely result in a lower monthly payment amount.
But refinancing into another 30-year mortgage means you’ll pile on additional interest charges, especially if you’ve been making monthly payments for a significant amount of time. So, weigh the pros and cons of this option carefully to be sure that it’s the best way to reduce your monthly mortgage payments.
» MORE:Calculate your potential refinance savings
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Make One Extra Payment Per Year
During any time of the year, its your right to prepay your mortgage. You accomplish this by making a second, separate payment to your lender in addition to your regularly-scheduled payment.
Making just one extra payment per year can reduce a new 30-year mortgages length by more than four years.
Multiply four years of payments by your monthly principal and interest due, and youll get a sense for how much money making one extra payment per year can save you.
Determine What Your Ideal Down Payment Amount Should Be
A down payment is a portion of the cost of a home that you pay up front. It demonstrates your commitment to investing in your new home. Generally, the more you put down, the lower your interest rate and monthly payment. There are also low or no-down payment options available on certain types of mortgage products, to qualified home buyers. Use this down payment calculator to help you answer the question how much should my down payment be?.
Estimated monthly payment and APR example: A $225,000 loan amount with a 30-year term at an interest rate of 3.875% with a down-payment of 20% would result in an estimated monthly payment of $1,058.04 with an Annual Percentage Rate of 3.946%.1
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Calculating Your Mortgage Overpayment Savings
Start Paying More Early & Save Big
Want to build your home equity quicker? Use this free calculator to see how even small extra payments will save you years of payments and thousands of Dollars of additional interest cost. Making extra payments early in the loan saves you much more money over the life of the loan as the extinguised principal is no longer accruing interest for the remainder of the loan. The earlier you begin paying extra the more money youll save.
Use the above mortgage over-payment calculator to determine your potential savings by making extra payments toward your mortgage. Put in any amount that you want, from $10 to $1,000, to find out what you can save over the life of your loan. The results can help you weigh your financial options to see if paying down your mortgage will have the most benefits or if you should focus your efforts on other investment options. As you nearly complete your mortgage payments early be sure to check if your loan has a prepayment penalty. If it does, you may want to leave a small balance until the prepayment penalty period expires.
Tip #0: Consider An Adjustable
If youre willing to take on a bit of risk, you may be able to get a lower interest rate by getting an adjustable-rate mortgage . With an ARM, your interest rate will start out low but could potentially increase over time. This is something to consider if you plan on selling your home within the next few years.
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Switch From An Fha To A Conventional Loan
FHA loans require a higher mortgage insurance premium payments as compared to conventional loans . Lets take a closer look at MIP. It has two components: an upfront premium and an annual premium. The current upfront premium rate is 1.75% of the loan amount. The current annual premium is 0.85% for the most common category of FHA loans. Though, annual premiums can be lower for lower LTV values or mortgage terms of fifteen years or less. Regardless, its not an uncommon financial strategy for borrowers to refinance from an FHA to a conventional loan once the 20% equity requirement is met just so they can avoid further mortgage insurance payments.
Refinance To Get A Lower Interest Rate
Even if you dont want to dramatically change your repayment timeline, you can still lower your payment by refinancing if you can lock in a lower interest rate than you have on your current mortgage. The impact of a lower interest rate can be dramatic when it comes to your monthly payment, although the specifics vary based on your situation.
Consider this example: A 30-year home loan for $300,000 with an APR of 4% would require a monthly principal and interest payment of $1,432. If you can repay the same loan amount over the same term but at a 3% APR, the monthly payment drops to $1,265 per month.
While interest rates are no longer at the record lows we saw in 2020, you can still get rates in the low 3% range on a 30-year mortgage. Depending on your current interest rate, that could still make a big difference in your monthly payment, though its important to keep the costs of refinancing in mind to make sure youre actually saving money in the long run.
For people who have already paid 10 or more years on a 30-year mortgage, theres another way to lower your interest rate switch to a shorter loan. Interest rates are typically lower on shorter home loans, so if youre currently 10 years into a 30-year mortgage, you could potentially refinance into a 20-year home loan to secure a lower interest rate and payment and still pay off your house in a total of 30 years.
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Paying Down More Principal
As noted above, the time when you start paying more in principal is called the tipping point. The interest portion starts to drop with every subsequent payment. And it can take years for you to get to that point.
Since the amount of interest you pay depends on the principal balance, you can reduce the total interest on your loan by making larger principal payments as you pay down the loan. You can do this by making a single lump-sum payment, which is normally called a prepayment, or by putting some additional money on top of your regular mortgage payment.
Let’s say your payment is $500 per month. your payments are $6,000 for the year. Adding an additional $100 for half the year means you’re paying $6,600. That additional $600 ends up going to the principal balance.
While this may sound really good, the question remains: Should you pay down your mortgage with extra payments? That depends on your financial situation. It only really makes sense if you can truly afford it and if your income is enough to support an emergency fund and retirement account contributions among other things. After all, the money you use to pay down your mortgage is money that can be used elsewhere. And you’ll want to make sure your lender doesn’t charge you any prepayment penalties or fees.
Ask About A Loan Modification
Alternatively, you can explore a loan modification, which can extend your loans term and/or lower your interest rate, if you qualify.
Those are options that are sometimes granted by loan servicers to help borrowers avoid foreclosure and prevent losing their homes due to circumstances that may or may not have been under their control, Laffey explains.
To be eligible, youll likely need to provide supporting documentation including proof of hardship, evidence of income, bank statements, and more.
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Potential Benefits Of Lowering Your Payments
Lowering your monthly mortgage payment by refinancing to a lower rate or extending your loan term can make it easier to pay your mortgage on time every month while also possibly covering your other debts and expenses. And if youre concerned about your ability to make your current mortgage payment in the future, lowering your monthly payment now can help relieve that pressure.
Minimum Down Payment On A House
The required minimum down payment for a house depends on the type of loan and a lenders criteria. Here are the minimum down payment requirements for the most common types of loans.
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Conventional loans, which arent guaranteed by the federal government, can have down payments as low as 3% for qualified buyers. Some lenders offer down payment assistance grants to allow even lower down payments.
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FHA loans, backed by the Federal Housing Administration, require a minimum 3.5% down. FHA loans allow lower minimum credit scores than conventional loans.
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VA loans for military service members and veterans, and USDA loans for certain rural and suburban buyers, usually require no down payment. VA loans are backed by the U.S. Department of Veterans Affairs, and USDA loans are guaranteed by the U.S. Department of Agriculture.
» MORE:to track your savings and reach your down payment goals.
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How Does Mortgage Interest Work
Mortgage interest is the interest you pay on your home loan. It is based on the interest rate agreed to at the time you sign your contract. The interest compounds, which means the balance of your loan is based on the principal plus any accumulated interest. Rates can be fixed, which remain steady during the length of your mortgage, or variable, which are adjusted at various periods based on market rate fluctuations.
Your mortgage payment primarily goes toward interest in the initial stage, with a small amount of principal included. As the months and years go by, the principal portion of the payment steadily increases while the interest portion drops. That’s because the interest is based on the outstanding balance of the mortgage at any given time, and the balance decreases as more principal is repaid. The smaller the mortgage principal, the less interest you’ll be paying.
You can expect to pay as much as 50% of the mortgage in interest. The point at which you begin paying more principal than interest is known as the tipping point. This period of your loan depends on your interest rate and your loan term. So someone with a 30-year loan at a fixed rate of 4% will hit their tipping point more than 12 years into their loan. Having a lower rate will get them to this point faster.
Your monthly payments remain the same for the life of the loan with a traditional, fixed-rate mortgage, which may have a term of 10, 20, or 30 years.
Maintain A Good Credit Score
Whether youre taking out a conventional loan, FHA loan, VA loan, or some other type, the foundation of a low mortgage rate begins with keeping your as high as possible. Lenders look at your credit score as a roadmap to your creditworthiness. A high score proves youre likely to repay your loan. And a low score means youre a riskier bet which means higher interest charges for you. One of the first things a loan officer will check is your credit score. It may be an imperfect system, but it helps the lender get a sense of what kind of borrower you will be.
The three credit bureaus tend to be quite secretive about how their scores are calculated. FICO credit scores are calculated as follows:
- 35% is based on your payment history
- 30% is based on your
- 15% is based on length of credit history
- 10% is based on new credit accounts
- 10% is based on credit mix
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Tip #0: Get A Mortgage From A Local Lender
Another tip is to get a mortgage from a local lender. Local lenders are typically more willing to work with borrowers who have less-than-perfect credit scores. They also tend to offer lower interest rates than national banks. So, if youre having trouble qualifying for a loan from a big bank, consider going with a smaller local lender instead.
