How you can save on Interest Payments.

Saving on interest payments

Source – Your Mortgage – Nila Sweeney 19.07.17

Paying off a mortgage early can literally save you thousands of dollars in interest repayments. The way it works is simple.

Your minimum monthly mortgage repayment for a principal and interest loan is calculated on how much per month is needed to pay off the balance of the loan or principal over the loan term, plus the interest that has been accrued on that balance.

Normal loan terms are around 25 years. You can, however, have lesser terms or longer terms if you desire. The shorter the loan term, the higher your minimum monthly repayment will be. Even if you think you can pay out your loan in 10 or 15 years, it’s a good idea to take the loan over a standard term of 25 years. This allows you a little more flexibility just in case things don’t go according to plan, and it also means that your minimum monthly loan repayment won’t be quite so high. It doesn’t mean that you will have to take the total time of the loan term to pay off your loan, (and in fact, hopefully using some of the tips in the article you won’t), but you have that long should you need it, and your minimum monthly repayments are manageable and affordable.

Understanding Principal and Interest

If interest rates didn’t change, the dollar figure amount of your loan repayment wouldn’t change either. What would change, however, is the percentage or ratio of how much of the repayment is paying off principal, and how much of that repayment is servicing interest costs. When you begin paying back a mortgage, most of the loan repayment is servicing the interest, while the remainder of the repayment is paying off the principal.

As you pay more and more off the principal, the interest portion of the repayment will be less, which means that the principal portion will be more. Towards the end of the loan term, the majority of the repayment is principal, while the remaining portion of the repayment is servicing the interest.

Benefits of extra repayments
One of the main benefits of making extra repayments towards your home loan is that it takes less time to pay off a loan and you pay less in interest. What this means to you is that the more principal you can pay off by putting extra funds into the loan, the more of your repayment will go towards paying off the loan, rather than being dedicated to servicing the interest.

So, plan wisely and try to repay as much as you can earlier.

Check out our Loan Repayment Calculator HERE.

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