Paying extra on your mortgage debt is always a good idea. Every extra dollar one pays to reduce the principal balance will shave time off the home loan and save thousands of dollars in interest charges.
Here are a few ideas:
Instead of making 12 monthly payments per year, the biweekly payment plan provides for one payment every two weeks, which adds up to 13 payments per year. We have 12 months in a year, so if you make one payment per month, you will end up paying 12 payments per year on your mortgage. However, if you’ll divide your monthly cost by half and make a payment every two weeks, the 26 half-monthly payments will add up to 13 monthly payments per year.
In some cases, switching to biweekly payments is as simple as asking your lender to alter your current payment plan. However, not all lenders allow customers to switch to biweekly payments at no charge. In order to prevent any cost utilizing this idea, you can have the half-monthly payment money transferred automatically from your checking account to a savings account every two weeks, and then at the end of the month, you transfer this money to your lender. By the end of the year, you’ll have made 26 half payments, which add up to 13 monthly payments, making one full extra payment per year. That extra payment per year can knock several years off a 30-year mortgage.. For example, a $200,000, 30-year mortgage with an interest rate of 5.0 percent would cost $186,513 in interest with the traditional 12 payments a year. However, make the equivalent of 13 monthly payments every year, and the loan will be paid off in 25 years and four months, saving almost five years of payments. You will pay only $153,814 in interest—a savings of $32,699.
Here is a table summarizing the interest-saving cost at different interest rates between making a 12 (monthly payment schedule) or 13 payments per year (biweekly payment schedule) on a $200,000, 30-year mortgage term and amortization at the following interest rates:
Most people would never guess that making one extra mortgage payment each year could save them so much money.
Once you look at these numbers and you see how much money you can save and how many years you can shave off your mortgage, I am sure you will give this idea a serious consideration.
Each month or every other month, add a set amount to your regular mortgage payment. Even an extra $50 or $60 per month adds quite substantially in the long run. For instance, if you pay a monthly loan an extra $50 per month on a $200,000 30-year mortgage with an interest rate of 5 percent, you will save $20,779 over the life of the loan, saving you 36 monthly payments.
How would you get an extra $50 to $100 per month? Here are a few suggestions:
- Pack your own lunches.
- Cancel your gym membership if you don’t use it.
- Buy or lease a cheaper car (just for a few years).
- Share a ride with colleagues if you drive to work. You will save on gas and parking cost.
- Rent your basement (if applicable).
- Consider how much you pay on personal trainers, protein shakes, supplements, golf, skiing, and other sports. Many don’t consider how much they spend because they either don’t pay attention to it or because they believe that they are spending money on something healthy or something they love. It’s all a question of priorities. If you make a commitment to getting out of debt faster, cutting back what you spend on some hobbies, even just for a while, may be a great option to consider.
- Change your cable plan.
- Change your internet plan.
- Cut your landline.
- Review and shop around for your car and home insurance policies.
- Renegotiate your bank fees.
- Sell what you don’t need.
- Cut unused subscriptions.
- Cut game rentals.
- Avoid impulsive spending, especially at the grocery store.
- Make yourself a budget. It will open your eyes to where the money goes and where you can save.
- Start a side hustle online.
- Use coupons. You can request them from many grocery chains or from coupon websites.
Did you ever consider that simply paying $50 per month will save you so much money?
Now what if you make $75 or $100 per month?
Using the same example as before, a $200,000 30-year mortgage with an interest rate of 5 percent will save you the following amounts over the life of the loan:
Different interest rates or different loan amounts will produce different amounts for the above numbers. Regardless, this table is an eye-opener and really echoes on the fact that paying any extra amount on your principal balance can make a substantial difference in the amount of interest you pay and the amount of time it takes to pay your loan.
In general, if a person can afford to pay higher monthly payments, then a shorter amortization period will certainly reduce the amount of interest and the time frame of the loan. Cutting the amortization schedule on a loan will command a larger monthly payment. However, at the same time it will accelerate the mortgage payment time frame because a larger portion of principal repayment is made with each payment.
Just be aware that once you set this loan in motion, your monthly payments will stay the same for the duration of the loan, so if a 15-year amortization loan payment stretches your budget to the hilt, think twice about it. You can use other ways to cut your amortization throughout the payment process with making periodic extra payments.
Are you getting a refund this year? If you are, you can use your refund or portion of it to pay down the principal of your mortgage. Your regularly scheduled payments won’t change, but making a practice of this habit will make a significant difference.
How much of a difference?
Well, let’s consider we apply a portion refund of, say, $500 per year. On a $200,000, 30-year mortgage with an interest rate of 5 percent, you will save $17,004 over the life of the loan, and you will pay off your loan in 27 years and eight months instead of 30 years.
What if we pay more?
Using the same example as before, a $200,000, 30-year mortgage with an interest rate of 5 percent will save you the following amounts over the life of the loan:
Any time you make extra mortgage payments, it goes straight to reducing the principal balance. With a lower principal balance, you are charged less interest with each payment, and therefore you pay your mortgage faster. A larger portion of your payment goes toward your principal and less to interest. If you have a long remaining term and/or a very large mortgage size, you might not notice a drastic change in your outstanding mortgage balance initially. However, as the years go by and as you can see from the above example, paying consistently year after year will save you thousands of dollars and save you years in payments.
Are you getting a raise in pay this year? If you are, you can use your raise or a portion of it to pay down the principal of your mortgage. Your regularly scheduled payments won’t change, but making a practice of this habit will make a significant difference.
How much of a difference?
Well, let’s consider we apply a portion of your annual increase of, say, $1500 per year. On a $200,000, 30-year mortgage with an interest rate of 5 percent, you will save $42,418 over the life of the loan, and you will pay off your loan in exactly 24 years instead of 30 years.
What if we pay more?
Using the same example as before, on a $200,000 30-year mortgage with an interest rate of 5 percent, you will save the following amounts over the life of the loan:
Keep in mind that every lender and every mortgage have its own prepayment rules.
To prevent any prepayment penalty, read your mortgage document or contact your mortgage lender before making the payment to make sure it is within the limit of what you are allowed to pay annually.
Paying any extra on your mortgage principal balance is a good idea. However, bear in mind that applying any of the above ways to reduce your mortgage principal will not reduce your regular monthly payment or allow you to skip a payment.
To learn more about your own mortgage situation, download the free excel amortization schedule and see your own particular situation and what will be the effect of making any extra payments on your own particular mortgage.
To download the spreadsheet, go to https://financial-wisdom.net/ and click on “Free Spreadsheet”