Now that we have talked about your wedding, you are ready to start your new life and probably want what the American Dream is all about: your own house with a white picket fence. Great! Just remember, usually, this house comes with a mortgage - for the next 30 years or so. Most people want to buy a home, so the long commitment to a monthly payment is not a deterrent.
Most of us sign on the dotted line and agree to the monthly payment without considering what the contract says, the only concern being that the APR is as low as possible, and the monthly payment manageable for the monthly budget. Everyone knows (or can find out) that the APR refers to the annual percentage rate. Though few know that is also influences the monthly payment for the mortgage. By having a smaller APR, your monthly payment will be lower - but have you thought that the amount of total interest is still high, because you pay less on the principal (the borrowed amount)?
This is why, in order to pay less interest overall, you need to make extra payments, so you reduce the number of years you pay it all off. I know all the financial gurus out there tell you to pay an extra payment a year or to make payments every other week when you get your paycheck, in order to save a lot of interest and pay off your home in less than the 30 years usual mortgage is set up for. This may feel like a tough order if you cannot afford an extra payment annually. Even if that is the case, you may still benefit from this technique if you can pay something extra every month - you may choose to round up your monthly payments to the nearest hundred, or add an extra $50 or $100 each month... whatever fits your budget. Just make sure that you designate the extra payment as going towards the principal, because otherwise it is very likely for it to go towards both interest and principal, and therefore diminish the impact on lowering the amount you owe.
We will be talking about the impact of the interest payment on your taxes for the year in a later post, but for now all I want to emphasize is the benefit of paying off the mortgage earlier than the original schedule. If you can pay the property taxes and the homeowners' insurance separately from the mortgage payments, it will help decrease your monthly payments, so you can pay more - if you can afford to add anything to that payment. A word of caution here: if you make payments for taxes and insurance by yourself, please make sure you plan them into your budget, so you can keep on track. In my experience, your payments will add to less than what the mortgage company charges through the escrow account.
Next week, we will talk about some budgeting ideas, to help you fit all this into your available money every month.
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