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You may be quite surprised to learn how much you can save on your home mortgage interest cost by adding to your monthly payments.  The additional amount paid reduces the principal of the mortgage (by shortening its life) and, therefore, reduces the total interest paid.  You can save thousands of dollars in interest by making small extra mortgage principal payments each month. 


The actual amount of interest saved is dependent upon how much you add to your regular payment, whether or not you are consistent in making that extra payment each month, and the remaining life of the mortgage.  It is important to note that the savings is in the interest cost and not in the interest rate.  Total interest cost over the term of the loan is much more important than the interest rate.  Of course, you should shop around for the best rate as well.


If you are buying a principal residence you should consider paying a one or two point loan fee to reduce the mortgage's interest rate.  You will not only pay a lower interest rate over the 15 or 30 year loan period, but the fee qualifies for an interest deduction in the year it is paid.  This is not true for a loan fee paid in connection with a refinanced mortgage.  These fees must be amortized over the term of the new loan.  Therefore, if at all possible, they should be avoided.


Many of you have probably received mail or telephone solicitations to convert your mortgage to a bi-weekly mortgage.  Undoubtedly there will be a "set-up" fee, which can be several hundred dollars, and an additional monthly fee of a few dollars.  Avoid these solicitations!  You can accomplish the same result without the fees by merely dividing your monthly principal and interest payment by 12 and adding that amount to each monthly payment.  This is because a bi-weekly mortgage is the equivalent to thirteen monthly mortgage payments each year, rather than twelve.


I would be happy to calculate your interest savings from adding to your monthly payments or answer any questions you have regarding this Tax Tip.


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