Updated 7 days ago on . Most recent reply
How to pay less interest on a mortgage?
hope all is well to all. I currently have my house for 7 years and was caught up in life and really sat down and watched my payments vs how much is still owed. In reality I only paid about $40,000 and paid $220,000 in interest and I almost passed out. So I am asking for any advice on strategies on how to minimize this interest the banks are gaining to benefit me? Thanks
Most Popular Reply
@Trevor Neale, a few thoughts:
1. I think you should ask yourself whether you are asking the right question(s)!
2. Let's imagine you have a paid off house and do a cash-out refi for $100k @6% interest. If you deploy that money and make a 10% return, you can pay the bank their 6% and pocket 4% profit for yourself. That difference between the 6% you borrow at the the 10% return is called "the spread". Business makes money on "the spread", the cost of money for them compared to what they can do with that capital.
In addition, since you own a property that you refinanced, if that property goes UP in value you also get 100% of the value it went up by!
3. Investors aren't worried about what the bank makes, they are worried about what THEY make by using the money borrowed.
4. Look at what a fully amortized loan is and how the payoff works. Many calculators have graphs that show you.
In the first several years you mostly pay interest, by about year 15, you are paying about half interest and half principle with each payment. From there things start to go quickly in your favor and by the end you are paying mostly principle.
5. If the interest rate is high and you want to make extra payments to principle that could be an option if that is your best use of capital at the moment, but once its locked up in the property you cannot easily access it if an opportunity comes along.
6. You can also stay aware so when interest rates are lower you are ready to pull the trigger and refinance. Then you will get the lower rate and choose whether to choose a loan with a shorter term to limit interest paid or go back out to a 30 year to make your payment smaller.