Why Pay Extra on your Home Mortgage?
Published on 5/29/2020
Here’s a great trick to save thousands on your home mortgage! Not only that, but you can pay it off many years ahead of schedule. Making extra payments each month towards the principal on you loan decreases the overall cost of your loan, as well as the length. Try to remember that day you sat down to sign pages and pages of loan documents. It’s always an exciting day, whether you are purchasing a new home, or you have managed to qualify for a lower interest rate. The number of pages and signatures in that packet seems endless. Buried somewhere in that sea of paperwork is one very important disclosure that most people sign and just quickly try not to think about. The actual cost of your loan.
Here is a sample breakdown. Let’s conservatively say that you take a typical 30-year fixed rate mortgage in the amount of $250,000 at an interest rate of 6 percent. Over the life of the loan you will pay $289,595 in interest alone. That’s more than the loan itself. By the end of your term, you will have paid $539,595 for your $250,000 home, not including closing costs, etc.
Here’s where the savings comes in. The loan in the example above comes with a mortgage payment of about $1500 per month. Let’s just say you decide to send in an extra $150 per month with your payment. (Make sure you tell your mortgage lender to apply this directly to your principle balance.) What effect does this have?
Well, over the life of your loan, you will shave off 6 years, 3 months’ worth of payments. Paying down your loan faster allows you to pay less interest. Instead of $289,595 in interest over the life of the loan, you would only owe $219,654, a savings of $69,941. That’s quite a chunk of change!
Let’s say you get really ambitious and scrape together and extra $300 to send in each month. (Maybe you eat at home a little more often, save Starbucks for a special occasion, or simply adjust your thermostat a couple of degrees to save on your utility bill.) No matter how you do it, that extra payment now shaves 10 years off your mortgage. You will own your home outright with no monthly payment in just 20 years. The equity in your home grew at a substantially faster rate, and, last but not least, you will have saved $110,776 for your own enjoyment rather than padding the pockets of your lender.
Make a commitment today. Go calculate that new payment amount. Shoot for the monthly equivalent of an extra mortgage payment or two each year. Tell your lender you want it applied to principle and start counting your savings today.