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It’s simple, the more you pay now, the less you pay later. But does that just mean a dollar for dollar savings in the long run? Definitely not! Most people have a hard time making extra payments because they don’t understand the extreme value of them. It’s much easier to focus on your current financial needs than to make a sacrifice and pay more upfront. Read on to see what a difference extra payments can truly make, and use these easy strategies to start to pay your mortgage down faster.
Does it Make a Difference?!
A resounding YES because of compound interest. I want to show you a simple demonstration based on a $100,000 30-year mortgage with a fixed interest rate of 5%. The numbers speak for themselves.
On a $100,000 mortgage over 30 years at 5% interest, you will end up paying $93,256.55 in interest alone. Let me say that again… $93,256.55. That is almost DOUBLE the amount that you took out for the original loan.
Look at your savings with a small extra payment of $25 a month. You save $10,317.89 in interest plus you finish paying your mortgage down 2 years and 10 months quicker! Sounds worth it for a small sacrifice each month.
What about $50 a month? That will cut your mortgage down by 5 years and 1 month! Saving you $18,412.81 in interest payments. I could think of quite a few things an extra $18,000 could go towards… and I’m sure you could too!
With an extra $100 a month, you could save $30,391.97 in interest as well as 8 years and 8 months of payments. This goes to show, extra payments make a HUGE difference.
It pays to put a little extra down a month, whatever you can afford… it will make a difference!
Want to calculate exactly what you could save? I use Dave Ramsey’s Mortgage Payoff Calculator. Now that you’ve seen the savings, let’s see some practical ways to help pay your mortgage faster.
Apply Windfall Cash to your Loans
Getting a big tax refund, un unexpected bonus at work, or other lump sums of money? Don’t add it to your budget, instead take it and apply it directly to your loan. It will shave off both time and interest on your loan.
Make a Payment Every Other Week
This is a great strategy for those who budget off bi-weekly paychecks. You make half of your mortgage payment every other week, and at the end of the year, you will have made one full extra payment on your mortgage. Simple enough, and you have an extra payment without even thinking about it.
Round Up Your Payment
Most of us have weird mortgage payments a month like $1264.71. If you choose to round up your payment, you will be making an extra payment towards your principal every month! For instance, with the $1264.71 mortgage, pay as little as $1270, or even round up to $1300 for a bigger impact on your savings.
Refinance Your Mortgage
Refinancing can save you a lot of money in the long run by cutting interest costs and allowing you to pay more towards your principal. You’ll want to calculate your potential savings with the Dave Ramsey mortgage calculator and keep in mind the closing costs of a new loan. My husband and I received an offer to save 1% on our interest on our mortgage by refinancing, but with closing costs and potentially moving within the next 3-5 years, this would have cost us more in the long run.
Payoff images taken from Dave Ramsey’s Mortgage Payoff Calculator site