Debt—nearly all of us have it, and we all want to get rid of it. The problem is lots of people don’t know they are paying too much for their debt when they could easily pay less. Here are a few tips that will help you not only pay less on what you owe, but also get rid of your debt quicker.
Pay More than the Minimum
This one seems obvious, but some people don’t realize the benefits of paying a little extra each month. Every time you make a payment, whether on a loan or credit card, a certain portion of your money is dedicated to the interest accrued since your last payment, and the other portion goes toward decreasing the principal owed. Paying more than the minimum will lower the amount of principal, thereby resulting in less of your money going toward interest and more going toward lowering your actual debt over the life of the loan.
Make Two Payments a month vs. Just One
If your monthly payment is $100 a month and due on the first of every month, you will pay less in interest over the course of your loan if you make two payments of $50 on the first and 15th of each month than you would making a singular $100 payment. This is because most banks compound interest on a daily basis. If you lower your principal twice a month instead of just once, there is less principal on which the bank can charge interest.
For example, if you have a $100,000, 30-year, fixed-rate mortgage with a 5 percent interest rate, your monthly payment will be $536.82*. If you make 12 payments a year of $536.82, you will pay $93,255.78 in interest over the 30-year period. However, if you make two biweekly payments of $268.41 instead, you will pay only $75,488.85 in interest. That’s a savings of $17,766.93, and you’re paying the same amount of money each month!
Bankrate.com has a calculator, which I used, that can show you the savings of a biweekly payment plan.
For more tips on how to get out of debt, stay tuned to this blog. If you’d like to save yourself even more money by refinancing your current mortgage at a lower rate, or have any other questions about mortgages and mortgage rates, please give us a call at 865-909-0211.
*There are a lot of different factors, such as insurance and taxes, that can affect the amount of your mortgage payment. This is just an example.