In today’s economy, when you need to make a decision of whether or not to pay extra on your mortgage payments, there are many factors that go into this. One important factor is the interest rates and how they will change in the future. If you would like to be more specific about what you should do, please feel free to contact me!
The “refinance or pay extra principal calculator” is a tool that allows users to calculate the amount of interest they would save by refinancing their mortgage.
There are several viable options for paying off a mortgage quicker. Most lenders will advise homeowners who have a standard 30-year loan to refinance into a 15-year loan. Another viable alternative is for a borrower to simply contribute a little amount to their monthly payment to go toward the principle each month.
I’ve been a frugal homeowner for almost 17 years, and I’ve tried every technique in the book to pay down my mortgage as fast as possible. I’ve tried both of these approaches, and after a lot of thought, I’ve come to the following conclusion:
Homeowners will have to make a personal choice about whether to refinance or pay more mortgage principal. Both alternatives will assist to shorten the loan’s payback period and lower the overall interest paid to the lender during the loan’s term.
There’s more to it than money, however. Each method has its own set of advantages and disadvantages, which borrowers must weigh.
In this article, we’ll go over each of these alternatives in detail and see how they affect a homeowner’s finances.
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Why Should You Refinance or Make Extra Payments?
Let me start by emphasizing that there is no incorrect solution in this case. Both options may shave years off the repayment schedule while also drastically lowering the amount of interest a borrower will pay during the loan’s life.
To further understand why, consider how the money in a mortgage payment is really spent.
What Is a Mortgage Payment Made Up Of?
Keep in mind that lenders use an amortization plan to arrange mortgage payments. Each payment will be divided into two parts:
- The fraction of the loan total that goes toward paying down the principal.
- Interest – The part of the loan that the lender retains as compensation for lending the money.
Assume someone wants to purchase a $250,000 property. They put down a 20% down payment ($50,000) and borrowed the remaining $200,000 on a 30-year fixed-rate mortgage with a 3.25 percent interest rate.
The cost would be $870.00 each month. The first payment would be as follows under this amortization schedule:
- $328.33 (principal)
- $541.67 in interest
The percentage of this payment going towards the principle will steadily rise over the following 30 years, while the interest part will gradually decrease. Lenders do this on purpose in order to collect the interest owing to them as quickly as feasible.
Credible* can help you refinance your mortgage.
The Effects of a 15-Year Refinance on Your Payment
When someone refinances into a 15-year mortgage, they will obviously pay it off in 15 years. But what they may not realize is how much of their monthly mortgage payment will now go toward the principle rather than the interest.
To demonstrate, consider the following mortgage, which has been altered to a 15-year term with a 2.50 percent fixed rate. (On 15-year mortgages, lenders often offer rates that are 0.5 to 0.75 percent lower.)
- $1,333.00 is the total amount due.
- $916.33 in principal
- $416.67 in interest
Because of the shorter term, the monthly payment is obviously much larger. However, the borrower is paying a lot more toward the principle and a lot less in interest each month. This will allow them to develop equity quicker while also lowering the total cost of the mortgage due to lower interest rates.
How Do Additional Principal Payments Affect Your Mortgage?
Most lenders will enable borrowers to pay additional money on top of their mortgage payments because they want to be paid back ahead of schedule. This money is then used to pay down the principal part of the loan.
Additional principle payments may be made in any amount: $50, $100, $500, and so on. It doesn’t have to be the same every time either.
For example, a borrower may start by paying $50 to their monthly mortgage payment, increase it to $100 after a few years, and ultimately reduce it to zero if other financial obligations arise. There is no obligation.
The more money a borrower puts toward their mortgage payment and the longer they make it, the quicker their loan will be paid off. They’ll also save money on interest on the payments they’ve erased by cutting years off the rear end of their payment plan.
Credible* can help you refinance your mortgage.
How to Decide Whether to Refinance or Make Additional Payments
I feel that the greatest place to start when making any financial choice is with the numbers. The data provide you with a strong basis on which to base your decision. Then, before making a final choice, a person might think about qualitative elements.
You may do any of these calculations yourself for the financial analysis by utilizing our free online mortgage calculator.
30-Year Fixed Rate Mortgage
Let’s use the same variables for the baseline calculation as previously, assuming a typical 30-year mortgage:
- Amount of loan: $200,000 ($250,000 less a 20% down payment)
- 3.25 percent interest rate
(Note: We’ll overlook closing fees, points, and other factors for the sake of simplicity.)
The total interest paid over the life of the loan under these conditions would be $113,349.
Option for a 15-Year Refinance
Let’s take a look at how this situation might alter if the loan was refinanced from a 30-year to a 15-year period.
Borrowers may really refinance at any point throughout their mortgage term. However, for the sake of this example, we’ll suppose that we refinance from the beginning.
Remember that a 15-year loan will have a lower interest rate than a 30-year loan. We’ll utilize 2.50 percent in this case as well.
The total interest paid over the life of the loan would be just $40,044 under this revised arrangement. That’s an incredible $73,305 less than a 30-year loan!
Credible* can help you refinance your mortgage.
Increasing Your Principal Payments
Finally, examine what would happen if someone kept their initial 30-year mortgage but made additional principal payments on a regular basis.
Those additional payments, in fact, may be any sum and paid at any time. But, for the purpose of this example, let’s just add the difference between the 15-year and 30-year payments: $463.17 more every month.
The total interest paid over the life of the loan would reduce considerably to $56,982 if this technique was used. That’s a hefty $56,367 savings over the planned schedule.
It is, however, still $16,938 more expensive than the 15-year refinancing option. Because the amortization proportions did not alter, this is the case. Even yet, the borrower paid more interest at the start of the payment schedule than someone who chose the 15-year option.
As a consequence, even though we increased our monthly payment to meet the 15-year figure, we weren’t putting as much money toward the principle. This is why paying down the mortgage in full will take 16 years and 1 month (as opposed to 15 years).
Refinancing or Making Extra Payments for Other Reasons
As we can see from the previous example, refinancing to the 15-year option saves the most money throughout the life of the loan. However, this isn’t the only aspect that should influence your selection.
There might be a variety of additional reasons why a borrower is completely qualified to choose one road or another. Here are a few additional things to think about.
When Is It Time to Refinance?
Here are some reasons why a borrower could choose a 15-year refinance:
- Paying the least amount of interest feasible. Some individuals are driven mad by the prospect of turning up tens of thousands of dollars to a bank. If the borrower’s primary aim is to reduce it as much as possible, a refinancing is a suitable option.
- Make a commitment to pay off your mortgage in 15 years. If a borrower refinances to a 15-year term, they’re stuck with this new payment, good or bad. This might be just the motivation they need to keep to their plan to pay it off as soon as feasible. However, if the extra payment becomes too much of a financial hardship, it may come back to harm them later.
- As rapidly as possible, increase your equity. Homebuyers will gain 2 to 3 times more equity with each payment than they would with a 30-year mortgage since a bigger percentage of the monthly payment would go toward the principle. Unless they intend to make a significant additional payment over the following 15 years, refinancing is likely to be the superior option.
- They’re eligible for a refinancing. A person must be in excellent financial standing and have a high FICO score to refinancing a mortgage. Someone with these qualities may wish to take advantage of this chance.
They intend to remain in the residence for an extended period of time. People who aim to stay in their current home for a long period are less concerned about their finances than those who want to relocate in a few years. This means they may devote their whole attention to paying off the mortgage and accepting a larger monthly payment.
Credible* can help you refinance your mortgage.
When Does It Make Sense to Pay Extra Every Month?
Refinancing may not be the best option for everyone. Here are some reasons why a borrower could choose to just make additional principle payments each month:
- They are unable to commit to the increased payment. A 15-year refinancing may easily add $400 to $600 to the typical homeowner’s monthly payment. If they fail to make that payment, they may face foreclosure. If a borrower has any doubts about being able to lock in this higher payment, the additional payment option may be preferable.
- They want a lot of options. What if a homeowner does not want to commit to an additional $500 per month payment? What if they want the flexibility to change it when their income fluctuates, or to turn it off entirely if things go tough? They may do this because of the additional payment option.
- Someone who is already behind on their payments. Because of the way the amortization schedule was arranged, someone who has paid into their mortgage for the previous 10 years or more has already paid a large amount of interest. As a result, refinancing into a 15-year mortgage may not provide much of a benefit.
- There is no need for a credit check. If someone has recently changed jobs or done anything that might endanger their credit score, there’s a significant possibility they won’t be able to refinance their home. The additional payment path, on the other hand, is free of red tape.
- They want to sell the residence as quickly as possible. Someone who is planning on relocating may not want to commit to a larger monthly payment in order to save money for their next home. They may not want to be stuck paying this higher mortgage in addition to their new property if the house is sold and lingers on the market for many months. In such instance, using the additional payment path will allow them to swap between the greater and lower payment amounts as needed.
The Mortgage Recast is a bonus option.
Recasting is an alternative to refinancing or making additional payments to restructure a mortgage.
A mortgage recast occurs when a homeowner requests that their monthly payments be adjusted by their lender. This usually occurs when the borrower makes a significant lump-sum payment, maybe as a result of a modest windfall, such as:
- A bonus at work
- Payment of an inheritance
- Equity from the sale of a previous residence
Everything about the mortgage remains the same: the interest rate, the amount of installments left, and so on. Recasting lowers the remaining payments due to the hefty one-time payment.
The main benefit is that the borrower would have more monthly cash flow with lesser payments. It also helps you avoid refinancing and all of the associated closing fees.
The downside is that it does nothing to speed up the chronology. Furthermore, since the monthly payments are now less, the borrower will grow equity more slowly and would likely pay more interest than if the loan was refinanced or additional principle payments were made.
Credible* can help you refinance your mortgage.
Should I refinance or just pay a higher monthly mortgage payment?
It will mostly be a question of personal choice whether to refinance or pay more mortgage principal. Although the data may indicate one course of action, there may be strong reasons for a homeowner to choose a different one.
Try a tool like Credible* if you’re thinking about refinancing. Rather than visiting various lenders online, Credible works as a one-stop shop where you can enter your information and obtain multiple offers with no strings attached. You may then determine which lenders would provide you with the finest deal and make you feel the most at ease.
If you’re leaning toward the additional payment choice, assess your financial situation and estimate how much you can afford. If the extra payment doesn’t get you near to the 15-year option, or you just want the freedom to change your payment whenever you want, stick with your existing mortgage and make extra payments as needed.
Again, both options are viable. It’ll basically come down to how urgently you want to shorten your deadline and save money on interest. Working down your mortgage, regardless of whatever path you choose, can help you secure your financial future for years to come.
Continue reading:
- What is a Mortgage Refinance and Why Do You Need One?
- You Can Easily Avoid These 3 Mortgage Refinancing Nightmares
- Refinancing Your Mortgage Can Save You $100,000
NMLS 1681276, not accessible in all states. *Advertisement from Credible Operations, Inc. NMLS 1681276, not available in all states. Important information concerning Credible’s licensing may be found here.
Should I Refinance or Just Pay More on My Mortgage Payments? appeared first on Should I Refinance or Just Pay More on My Mortgage Payments? The post Minority Mindset appeared first on Minority Mindset.
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The “refinance calculator” is a tool that allows you to estimate how much money you would save by refinancing your mortgage.
Frequently Asked Questions
What happens if I pay an extra $1000 a month on my mortgage?
A: Buying a house with an extra $1000 per month on mortgage is the same as buying it for $5000 less than the original price.
How can I pay off a 30-year mortgage in 15 years without refinancing?
A: There are a few ways to do this, but the most common way is through paying down your mortgage by saving up and investing at an adequate rate.
Is paying extra on your mortgage worth it?
A: It is always worth it to pay your mortgage on time. If you are paying in full or close to it, there will be no extra fees for late payments which can save you a significant amount of money in the long run!
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