How Compounding Interest Can Impact Your Mortgage.
How Compounding Interest Can Impact Your Mortgage.
Compounding interest is a way to make your money grow exponentially. It is the addition of interest that has been earned during a specific time period which then gets added to the principal of your account. The more time, the more interest is added to the principal which means it will get larger and larger with every passing day.
This blog post covers how compounding interest can impact mortgages and why you should consider it when purchasing a property.
The Basics
of Compounding Interest
Compound interest is the most common way to calculate interest and it can be calculated in one of two ways:
1)
The amount of money you earn in a year is added to the principal.
2)
The amount of money you earn in a day is added to the principal.
Both methods add more and more interest over time which means your money will grow exponentially. This blog post will cover compounding interest when it pertains to mortgages, but this concept applies to any other type of loan as well.
Why Compounding Interest is Important
Compounding interest is an important factor when it comes to mortgages. This is because mortgage rates are generally higher than the rate of inflation.
Interest rates are usually set at a fixed amount, which means that the longer you take to pay off your mortgage, the more money you’ll end up paying in total. That’s why it’s important to be aware of compounding interest when purchasing a property. If you’re buying a property that has a large mortgage attached, then you’ll want to make sure that you can afford the monthly payments and will have enough money saved up for a down payment. It’s also important to consider how long it will take you to pay off your mortgage in full and whether or not your bank will allow for early repayment. Compound interest can quickly add up if you don’t know what you’re doing, so make sure that this is something that’s considered when purchasing a property.
How Compounding Interest Affects Mortgages
You may have heard about the importance of compounding interest when you were in school, but did you know that it can impact your mortgage?
Mortgages are loans with a predetermined rate of interest. What this means is that the amount of money you owe the bank for your mortgage will grow over time. The amount owed will be increased by the interest rate (which varies depending on where you live) and any fees charged to take out your loan. Compounding interest is an often overlooked but important part of mortgages because due to its effect, it can make your loan payments higher than expected. For example, if someone has a $100,000 mortgage, which is compounded monthly and at 4% interest (average for most mortgages), they will need to pay $548/ month starting in one year. That same loan would cost them $638/month starting in two years or $744/month starting in three years.
Compound interest can be beneficial if it is invested wisely because it makes investments grow at a faster rate than regular interest. However, compound interest can also work against investors when borrowing money or paying off loans-especially if the borrowing period is long-term. The effect of compounding can create an environment where people feel like they are losing ground each day instead of making progress towards their goal.
Longer terms means more interest compounding
If you choose a 30-year mortgage, you’ll have the total amount of interest slowly compounding over time. If you choose a 15-year mortgage, the same amount of interest will be compounded but over half as much time.
Lower Payments Mean More Savings
Compound interest is the most powerful way to save money. If you have a home mortgage, you can take advantage of compounded interest by making bi-weekly payments instead of monthly payments.*
What this means for your mortgage is that you will have a lower payment each month and also have more time before your house reaches the full amount of what you owe. This way, you can pay off your home sooner, which means your monthly payment will be smaller and you’ll save more in the long run.
Conclusion
Given how compounding interest works, you may want to consider extending the term of your mortgage to reduce your monthly payment. If you feel like you can afford it, this can be a great way to save money in the long run.
Extending the term of your mortgage is only one way to potentially reduce your monthly payments. Some people are able to pay off their mortgage faster by increasing their monthly payments. If you are interested in learning more about different ways to manage your mortgage, contact us today!