When you buy a home you generally have to take a loan out from the bank called a mortgage. More often than not these mortgages come with an interest rate that increases the amount of money a person must pay back to the company that lent them the money for the home. With the average term of the loan being thirty years, banks will make a lot of money from your mortgage over the term of the loan.
Because the bank wants to protect itself against the possibility of a lender either defaulting on the loan or getting a new mortgage before the loan is paid off, most mortgages are set up to have the bank collect most of the interest that will be paid on the loan during the earliest parts of the loan. This is called amortization.
Principal and Interest
Every mortgage payment is broken into two different parts. These parts are called the principal and interest. When the bank receives your payment, it applies so much of the money to the principal of the loan (which was the amount you actually borrowed) and to the interest of the loan (what the bank charges for lending you the money) Because of amortization, the first several years of payments pay more towards the interest then they do to the principal meaning that you will be nearly halfway through the term of your loan before you actually start seeing any real dent in the principal of itself. It is in this amortization were the key to saving thousands on your mortgage lies.
While it is really little you can do to decrease the amount you pay each month short of refinancing your home, you can actually shorten the term of the payment considerably (and thus avoiding thousands of dollars in interest) by sending in a little extra money each month and applying for that money directly to the principal of the loan. This saves you money in two ways.
Pay Loan Off Faster
The first and probably most obvious way doing this saves money is that it will get the loan paid off faster which means overall you will pay fewer payments and thus pay less in interest.
The other way that you save money is that by reducing the amount of the principal, you reduce the amount of the interest payment as well. Interest is applied to the principal of the loan and if that amount grows smaller than the amount of money charged in interest will grow smaller as well.
Make A Commitment Today
You don’t have to be wealthy to do this either. Simply sending in as little as twenty dollars a month and having it applied directly to the loan can shorten the term of your loan by two or three years if not more. Of course the more money you apply to the principle the more money you will save, but even a little each month will save you thousands of dollars in the long run. It is a simple and easy way to save money.