Lenders will make a "good faith" estimate that will give you a close approximation of what your closing costs and monthly payments will be, but when you see it all added up at the end, it can be scary! For example, your monthly principal and interest payment on a $100,000 loan at 8-1/2 percent over 30 years is $768.91 per month. This is not so bad until you consider that this is $276,809 over the entire period of the loan, with interest payments comprising $176,809 of this amount! Whew!

Don't let these numbers intimidate you. The value of your new home will in all probability easily keep up with inflation and even a low rate of inflation will make your payments easier to make in the future. Plus your interest payments are tax deductable.

Still, the quicker you reduce your payments, the less interest you will pay and the more money you will have for other purposes. Plus, for many, not having a mortgage payment is an important goal that is deeply satisfying and may add an extra measure of security to your life. The problem is how to reach this goal...

Taking out a mortgage for less than the customary 30-year term will save you a significant amount of money. For example, interest rates on 15-year loans are typically about half a percent lower than 30-year loans. Even if you don't count a lower interest rate, an 8-1/2 percent 15-year $100,000 loan would cost you $984.74 per month, but only $77,253 in interest over the term of the loan. This represents a savings of $99,556 over the 30-year loan!

Payments on a 15-year loan are not twice that of a 30-year loan, but only 26 percent higher! This means that you don't have to have twice as much income to qualify for the shorter loan period.

If you can't quite handle the payments on a 15-year loan, a 20-year loan is a good compromise. For the same 8-1/2 percent loan over 20 years, you would save $68,531 over the 30-year loan!

Another method of saving mortgage interest is paying your mortgage biweekly instead of monthly. Instead of making one large payment every month, you pay half that amount every two weeks. Since there are 52 weeks in a year, you make 26 half payments instead of 12 full payments, consistently reducing your principal every 14 days instead of 30 or 31 days. Since you pay interest on the principal every day you owe it, this adds up to significant savings. Your 30-year loan paid biweekly would be paid in 22.4 years, saving you $61,800! Because this loan requires extra accounting effort, most lenders require your payments to be made by payroll deduction or automatic payment from your bank account.

An excellent way to save interest on a conventional 30-year loan is to have your lender provide an amortization table for your loan payments, then add next month's principal payment along with your monthly payment. For example, your monthly payments for your $100,000 loan are $768.91, and your first monthly payment (let's say it's January) will consist of $708.33 in interest and $60.58 in principal. Your amortization table tells you that your next month's principal (February) is $61.01, so you add that to your payment, making it $829.92. This eliminates completely what would be February's original interest charge of $707.90!

If you follow this method of paying the agreed upon amount ($768.91) plus the next month's principal, your loan will become a 15-year loan, but you'll have the advantages of qualifying at the lower payment rate, and if you have a tight month, you can choose to eliminate the extra payment! A disadvantage is that since most principal payments come at the end of a loan period, your payments will get pretty high near the end, but you may be better able to afford higher payments later in exchange for a shorter term.

Whatever plan fits your situation best, keep in mind that interest continues relentlessly on the unpaid balance. Only $25 extra a month will save you $25,930 in interest payments over the term of a 30-year loan! Don't forget to keep good records and write any extra payment on your payment coupon so the amount will be credited to reduce your principal. Most importantly, remember that regularly adding any small amount to your monthly payment will bring you big savings in the future!

NOTE: Although interest rates change daily, the principles outlined in this article are valid whatever the interest rates will be in the future.