Do you currently have a 30 year mortgage? Have you ever thought about making extra payments to save on interest and reduce the number of years that you’ll need to pay in to the bank? To be completely honest, I think about it every day (and I think it’s driving my wife nutzo!). I can’t stand the thought of throwing my money away, and paying all that interest on a home loan is basically like taking a bunch of Benjamins out of my pocket and hucking them into the trash can (and the bank sneakily opens the secret hatch to add your wad to their money mountain).
How to Avoid Paying All That Interest
If you’d like to pay off your mortgage early, you’ll obviously need to avoid paying the thousands of dollars of interest. It’s pretty common knowledge that one can pay down their house loan faster if they make extra payments, but have you ever stopped to think about why that is?
When you make an additional payment, the bank will typically give you the option of postpone the next payment or to put the money toward the principle. If you are given this option, please please please decide to put the money toward the principle! Here’s why:
- When your additional payment is used as a regular payment for the next month, nothing really changes. Your total amount paid on the house is still just as high as it was before your extra payment.
- If you put your additional payment toward the principle, you’ll never have to pay the interest for that month! It simply vanishes and you suddenly reduce the number of years that you’ll need to pay for that mortgage!
How Much Can The Extra Payment Really Help?
If you’re paying $1,000 each month, how much could you really benefit by throwing an extra $100 at the mortgage? It just doesn’t seem like it would have that big of an impact…or will it? Let’s run a few examples with a handy-dandy mortgage calculator.
If you bought your house in July, 2011 and started paying an extra $100 in March 2012, you’d save $25,900 in interest and you’d pay off your mortgage in 25.5 years instead of 30! Check out the graph above – the blue line shows the typical payoff schedule, and the green line shows your extra $100 payments each month. Just think, all you have to do is scrounge up an extra $100 a month and you could own your home free and clear almost 5 years sooner!
What if you got radical and started paying $500 extra each month? How soon do you think you’d be able to pay off the mortgage?
By paying an extra $500 a month, you’d be able to pay off your mortgage in 16 short years, plus you’d save $74,650 in interest payments! Sounds like it might be worth it to pinch some pennies throughout the month and make those extra payments, huh?
Let’s Get Crazy And Put Even More Money Toward the Mortgage
I know, I know…. you think I was crazy suggesting that you could put an extra $500 toward the mortgage, and now I’m saying that you should scrounge up even MORE MONEY?? “That’s just not possible,” you might say. “We’re barely making ends meet as it is.”
What if you started a side business (like this website – check out my income reports)? Or, maybe you take on a part-time job at night to get rid of your debt? I bet that would free up some cash for you – maybe even enough to put an extra $1,500 toward that house loan? Check out the impact this additional payment could have.
You could own your house free and clear after 9 years! Not only that, but instead of paying $150,000 in interest to the bank, you’d only pay $40,000! Now that’s a pretty sweet deal, don’t you think?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.