We have all seen ads floating around the Internet that promise to let you in on a special secret that magically cuts your mortgage in half. The ads scream “Use this Trick to Cut Your Mortgage in Half” or “This Mortgage Secret has Banks on Edge — Will Save You Thousands” or how about “This Obama Program Takes 15 Years Off Your Mortgage.” The exact verbiage of the ads may be a bit different but you get the idea. The ads are ubiquitous and enticing — who wouldn’t want to cut their mortgage in half?
At FREEandCLEAR, we are passionate borrower advocates and always seeking new ideas to help people save money on their mortgage so we decided to dig a little deeper. Could there really be a government program, secret, trick or perhaps a magic wand that cuts your mortgage in half? Much to our dismay, these claims fall under the category of too good to be true. Most of the ads direct people to online forms where you are requested to submit your personal information and in return for providing your information you are contacted by multiple mortgage lenders. There is nothing wrong with requesting someone’s contact information and we are certainly proponents of comparing lenders when you shop for a mortgage. Not surprisingly, however, these websites do not offer borrowers miraculous tricks or magical spells to slice their mortgage in half, so the ads are misleading at best.
But what if we wanted to actually cut our mortgage in half? Is that even possible or simply a false myth promulgated by deceptive Internet ads? It turns out that there are legitimate ways to cut your mortgage in half (or nearly half) and none of them involve tricks.
Select a 15 Year Mortgage Term
The easiest way to cut your mortgage in half is to literally do just that. Most borrowers select a 30 year mortgage because it offers them the lowest mortgage payment which allows them to qualify for a larger mortgage amount and buy a nicer home. Selecting a 15 year mortgage, so literally cutting the length of your mortgage in half, can save you tens of thousands or even hundreds of thousands of dollars in interest expense over the life of your mortgage. A 15 year mortgage enables borrowers to save money two ways. First, by cutting the term in half, you pay off your mortgage in half the time which means you pay a lot less interest. Second, the interest rate for a 15 year mortgage is lower than the interest rate for a 30 year mortgage. So not only do you pay interest for a shorter period of time but you pay a lower interest rate. The downside of a 15 year mortgage is that the monthly payment is higher. The example below illustrates the difference in interest rate, monthly mortgage payment and total interest expense over the life of the loan for a $300,000 30 year mortgage as compared to a 15 year mortgage.
Example: Comparing a 30 Year Mortgage to a 15 Year Mortgage
30 Year Mortgage
Interest Rate: 3.625%
Monthly Payment: $1,368
Total Interest Expense Over Mortgage: $192,534
15 Year Mortgage
Interest Rate: 2.750%
Monthly Payment: $2,036
Total Interest Expense Over Mortgage: $66,455
Based on today’s interest rates, a borrower would saves $126,080 in total interest expense over the term of the mortgage with a 15 year mortgage as compared to a 30 year mortgage but the monthly mortgage payment for the 15 year mortgage is $670 higher. It is important to highlight that the higher the interest rate and greater the mortgage amount, the more money you save with a shorter mortgage. As the example demonstrates, if you can afford making a higher monthly payment, selecting a 15 year mortgage enables you to cut your mortgage in half and save thousands of dollars in interest expense over the life of your mortgage.
Mortgage Acceleration
Another way to shave years off your mortgage is by using mortgage acceleration, or paying more than your required monthly mortgage payment. In essence, by overpaying your mortgage, acceleration enables you to pay down your principal balance faster which reduces the length of your mortgage. By reducing the length of your mortgage you reduce your total interest expense over the life of your mortgage (as exhibited above when we compared a 15 year mortgage to a 30 year mortgage). The length of time you reduce your mortgage by and amount of interest expense you save depends on how much you accelerate your mortgage. The more you overpay, the quicker you pay off your mortgage and the more money you save. The example below demonstrates how mortgage acceleration works by comparing a $300,000 30 year fixed rate mortgage where the borrower makes the required monthly payments to an accelerated mortgage where the borrower overpays by $500 every month over the life of the loan. By accelerating the mortgage the borrower reduces the mortgage term by 11 years and 8 months saves $82,074 in interest expense over the life of the mortgage. You can use the Mortgage Acceleration Calculator on FREEandCLEAR to evaluate different overpayment amounts for your mortgage.
Example: Mortgage Acceleration
30 Year Mortgage
Monthly Payment: $1,368
Mortgage Length: 30 years
Total Interest Expense Over Mortgage: $192,534
30 Year Mortgage with Mortgage Acceleration
Monthly Payment: $1,368
Monthly Overpayment: $500
Mortgage Length: 18 years and four months
Total Interest Expense Over Mortgage: $110,460
Total Interest Expense Savings: $82,074
Mortgage acceleration is ideal for borrowers who are looking to reduce their mortgage term but want to preserve the option of making the lower 30 year mortgage payment. One creative way to think about mortgage acceleration is to get a mortgage with a 30 year term but make the same payment that you would with a 15 year mortgage. That way you maintain the flexibility of having a lower required monthly mortgage payment that goes along with a longer mortgage term (in case you cannot afford to make the higher payment), but you pay off your mortgage in 15 years and save hundreds of thousands of dollars in interest expense.
The good news about mortgage acceleration is that it is the borrower’s choice completely. You could decide to accelerate your mortgage by $500 one month, $1,000 the next month and then make your required payment the following month. You can apply mortgage acceleration at any time — for the entire term of your loan or you can start and stop years into your mortgage. Additionally, you do not incur any additional cost by accelerating your mortgage. Simply add the overpayment amount to your monthly or bi-weekly mortgage payment and indicate to your lender that the extra amount goes to pay down your principal balance (either in the comments section of your check or by contacting your lender if you use auto pay). Although you would have to pay significantly more than your scheduled payment to literally cut your mortgage in half, mortgage acceleration can be a powerful tool for borrowers to eliminate years and thousands of dollars from your mortgage.
So do not let the ads fool you — there is no shortcut to cutting your mortgage in half. And selecting a shorter mortgage or applying mortgage acceleration are certainly not mortgage industry secrets. All borrowers need is the right information, sound financial planning and a little discipline to trim years from their mortgage and save thousands of dollars.
