Are you looking to save money on your mortgage over the life of your loan and pay off your mortgage faster? Who isn’t? The quicker you pay it off, the less interest you will pay.
But what if you can’t afford to pay much more than you are already paying? Then, this article is for you. Here’s a look at how paying just $50 more per month towards your mortgage can help you accomplish this goal.
Plus, see how paying $25 and $100 extra per month will impact your overall cost!
How much can paying $50 more per month save you?
Should you start paying $50 more per month on your mortgage? Let’s do the math.
The average U.S. home loan amount is about $230,000 and the average interest rate on a 30-year fixed mortgage was 3.72% last year. If your home purchase was in line with those averages, your estimated monthly payment would be $1,061 before homeowner’s insurance, property tax, and HOA fees. If you stick to the payment schedule, your house will be paid off in 30 years and you will have paid $152,129 in interest.
However, if you pay an extra $50 per month, bringing your monthly payment up to $1,111, your loan will be paid off in just 27 years and you will only pay $138,479 in interest.
So how much will you save?
In this example, you would save $13,650! Plus, you’ll be done making payments about three years earlier.
How much can paying $100 more per month save you?
What if you have a little more disposable income and you want to pay $100 extra per month towards your mortgage?
Using the example above but increasing your payments to $1,161 per month, you would pay off your loan in 25 years and would only pay $127,185 in interest.
So how much will you save?
In this example, you would save $24,944 and could shave about five years off the life of your loan!
|Payment||Payment +50||Payment +100||Payment +200|
|Interest paid over loan term||$152,129||$138,479||$127,185||$109,525|
|Year loan is paid off||2051||2048||2046||2043|
|Time saving (in years)||0 years||3 years||5 years||8 years|
Would paying an extra $25 per month help you pay off your mortgage faster?
We’ve seen the impact that paying $50 extra per month can make but what about $25? Is that worth the trouble? Possibly! Even paying just $25 per month extra could shave about one year off of your loan and could save you $7,165 in interest.
How to make an extra mortgage payment.
If you decide you’d like to pay extra to your mortgage, how do you do so? While it may seem as simple as sending a higher amount when you make your payment, there is a small but important detail. You need to make sure that you specify that the additional funds you are paying should be applied to the principal balance. If you don’t, the amount could be applied to paying down the interest on your next scheduled payment. In that case, it won’t help you quite as much.
Should I make extra mortgage payments to pay off my mortgage faster?
There’s no doubt that paying $50 extra to your principal amount can help you to shave time and dollars off of your mortgage. However, if your budget is extremely tight, the long-term savings may not justify the short-term costs. Further, you may be able to see higher earnings by investing that $50 per month somewhere, such as the stock market. It’s a good idea to sit down, review your budget, and see if it’s a move that’s right for your household at this time. If it’s not, it may be something you want to do in the future.
Read more about the pros and cons of paying off your mortgage early below.
Pros of paying off early
Eliminate your monthly payments.
Once your mortgage balance is down to zero, you will no longer have to pay that monthly bill. This means a few hundred or even thousands of dollars back in your budget each month.
Save money on interest.
The longer your mortgage is being paid off, the more interest you’re paying over time. The earlier you pay off the balance, the less interest you’ll be paying over the life of the loan, ultimately saving you potentially thousands of dollars.
Better for retirement.
When you’re ready to move on to the next stage of your life and head into retirement, not having a mortgage can mean more money in your pocket. With retirement usually comes a fixed income, so the less you need to spend out-of-pocket on bills, the better.
More available equity in your home.
The more equity you have in your home, the more money you may qualify to borrow in the future for any major renovations you may want to do. Home equity is the value of your home minus your mortgage balance. The more money you have as equity, the more you can get back in re-sale as well as if you choose to borrow funds using a home equity loan or line of credit.
Peace of mind.
Arguably the best part of paying down your mortgage is the peace of mind you have knowing that you are the sole owner of the property. This means that there are no more liens on your home, and it’s no longer collateral.
Cons of paying off early
No more tax deductions.
If you claim the interest-paid tax deduction each year, you’re no longer eligible for this once you pay off your mortgage.
Ties up your liquidity in your home.
A liquid asset means the asset can be turned into cash without affecting its market value, such as cash and checking or savings accounts. If you’re spending all of your available funds on your home, you no longer have those liquid cash or account assets. Be careful not to invest more than you can afford because you won’t get that money back until you sell.
Reduces opportunity for a better return on investment
Before allocating extra funds to additional mortgage payments, consider all other avenues in which that extra cash can provide a better return. Options to consider and prioritize include:
- Pay off high-interest debt – Student loans, car payments, credit cards, etc. Be sure to eliminate all high-interest debt before you consider making additional mortgage payments.
- Invest 15% of your income into a 401(k) or Roth IRA. If you aren’t contributing 15% of your income to your retirement savings, plan to prioritize your additional funds to support your retirement goals.
- Determine if you need to prioritize other savings goals (i.e., college savings fund for your family).
- Consider investing in the stock market to get a better return on investment. The historical average stock market return is 10%. The rate of return can vary over time depending on a variety of factors, but a return of 6%-7% would still be more beneficial than a 4% return from paying off a mortgage. It’s important to note that we are not professional investment advisors. Be sure to consult with an expert to determine if a stock market investment is right for you.
We are here to help!
Do you have questions about your mortgage and making extra payments to cut your costs? Our team is standing by, ready to help. We can help you understand your current loan and how much you can save. Simply reach out to our team today and we’ll help you run the numbers.
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