How to Lower the Total Cost of Your Mortgage
The monthly payment is what you notice, but the total interest is what a mortgage really costs. These examples use a $300,000 loan to show which choices make the biggest difference.
Open the tool: Mortgage Calculator
A small change in the rate adds up
On $300,000 over 30 years, every half point of interest moves the payment by roughly $95 to $102 a month, and the total interest by $34,000 to $37,000.
| Interest rate | Monthly payment | Total interest |
|---|---|---|
| 5.5% | $1,703.37 | $313,212 |
| 6% | $1,798.65 | $347,515 |
| 6.5% | $1,896.20 | $382,633 |
| 7% | $1,995.91 | $418,527 |
| 7.5% | $2,097.64 | $455,152 |
A shorter term costs more each month and far less in total
A shorter term raises the payment but cuts the interest sharply, because you borrow the money for less time. The same $300,000 at 6.5%:
| Loan term | Monthly payment | Total interest |
|---|---|---|
| 15 years | $2,613.32 | $170,398 |
| 20 years | $2,236.72 | $236,813 |
| 30 years | $1,896.20 | $382,633 |
A bigger down payment helps twice
Every amount you put down is money you do not borrow, so both the payment and the interest fall. At 6.5% over 30 years, each $10,000 less borrowed lowers the payment by $63.21 and the total interest by $12,754.
In the US, putting down at least 20% on a conventional loan also avoids PMI. Lenders may also offer a better rate at a lower loan-to-value ratio, so ask where their rate steps are.
When extra payments make sense
Every extra payment earns you a sure return equal to your mortgage rate. Before you make one, check these points:
- Pay off debts with a higher rate first, such as credit cards.
- Keep an emergency fund, because money paid into the mortgage is hard to get back.
- Check your contract for prepayment fees or yearly limits on extra payments.
- Ask your lender to apply extra payments to the principal, and whether they shorten the term or lower the payment.
Checklist for comparing mortgage offers
Compare offers for the same loan amount and term, and look beyond the headline rate:
- The annual percentage rate (APR), which includes most fees.
- Upfront costs such as origination fees, points and appraisal fees.
- How long the rate is fixed, and what happens after that.
- The rules for extra payments and early repayment.
- Required insurance, and whether it is paid together with the mortgage.