As anyone who has taken out a mortgage knows, the interest charged over the life of a 25 or 30 year loan can add up to a large amount. Too many people just pay it. What you might not know is that there are some strategies that result in paying less interest and getting rid of the principal faster. Keep in mind that banks structure loans in a way that is beneficial to them and so that they can make the most profit (interest) from your mortgage.
Offset Account
One clever way to reduce the amount of interest you pay is to set up an "offset" account, according to the Financially Free website. The process and reasoning behind it are not complex. Many people have their paychecks deposited into a checking or savings account and pay the mortgage manually each month. These types of accounts pay next to nothing in interest. Instead, open an interest-bearing account where your paycheck is deposited. Let your money sit there each pay cycle and arrange to have the mortgage automatically paid by your bank at the latest date possible. Meanwhile, get a no-fee credit card with a 30-day interest free feature and charge your day-to-day living expenses to it. The end result is that you have a big chunk of change drawing interest in your offset account that has the effect of reducing your mortgage interest. The key to this method is always to pay off the credit card on time.
Loan Modification
Receiving a loan modification from your lender is another way to reduce the mortgage interest that you pay on your loan. For a variety of reasons, or for no reason at all except a desire to save money, you can ask your lender for a loan modification. The process works by the bank creating a new loan, with more favorable terms, that allows you to pay off the old one. Banks, of course, prefer to make more money rather than less, but, if you can show a legitimate need to have your loan modified, such as a change in your financial situation that makes the present payment untenable, your lender may listen. A good time to seek a loan modification is when you notice that the federal rate of interest has dropped below what you're currently paying.
Biweekly Payments
Since mortgage interest is calculated on a daily basis, some borrowers split the monthly mortgage payment in half and make a payment every two weeks instead. There are a few different ways this helps reduce your mortgage interest. The first is that you are paying down the principal balance at a faster rate, which reduces the interest charged compared to a once a month payment. Also, since there are 12 months in the year, but 52 weeks, you pay an extra monthly payment each year by going the biweekly route. This reduces the amount of interest that you are charged by reducing the loan amount faster.
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