Refinance & Reduce Your Balance Faster:
With lower interest rate, you pay more principal with each payment, especially in the first years of the loan. EXAMPLE: After five years of payments on a 30-year loan of $200,000 at 4% you would pay $19,706 in principle vs. $17,105 on the same at 5%. That’s an extra $2,601 in benefits on top of the $7,052 of interest savings. Total advantage = $9,653.
Two ways to make this happen:
- Pay extra principle: Apply your monthly savings toward principle to shorten your loan term by several years. EXAMPLE: using the same loan terms from above, pay your $118/ month savings as extra toward principle and cut the loan from 30 to 24.33.
- Refinance for a shorter term: Rates on 15-year loans are typically lower than 30-year loans, so a payment on a shorter term may still be within a comfortable range for you.
Maximize Your Rate of Return Through Investments:
If you deposit the $118 monthly saving form the example above into a tax deferred account earning 6% over time, it will grow to $81,852 in 25 years. if you use the savings to increase your 401K contribution with a 50% employer match, that figure would equal $122,782. Earning 6% on your money may be tough right now, yet historically, returns on a property balanced and diversified portfolio are 7% or better.
Tap Into Your Equity.
If you need to make repairs or improvements, you may be surprised at how much cash you might be able to free up without increasing your monthly payment.