How paying ahead on your mortgage could save you $38,000 (or more)
We’re sure you’ve already read our post on compound interest, so you might be thinking you already know about interest payments, but if you have a mortgage, or are ever planning to get a mortgage, you are going to want to keep reading.
For most people, a house is the largest purchase they will ever make, and a mortgage is the largest amount of money they will ever owe. Although mortgage rates are low right now, a low interest rate on a large sum of money still adds up to a lot of money in interest payments.
When you first start paying back a mortgage, most of the payment will be interest, so you won’t chip away at that principle very quickly in the beginning. Every payment you make will be a little more principle and a little less interest, but it will be years into your payments before the principle portion overtakes the interest portion, if you make all your payments as scheduled.
Most lenders will note on your mortgage agreement and on each bill that there is no penalty for early repayment. This is important and can help you save a TON of money. Any payments you make ahead of schedule will go entirely toward paying down the principle, which will have a big impact on paying down your mortgage quickly and less expensively.
As an example, if you have a $300,000 mortgage and pay 4% interest, over a 30 year loan, you will pay over $215,000 in interest, meaning you will pay the bank over $515,000 for that $300,000 loan.
If you pay 10% ahead every month, you will pay off that $300,000 mortgage almost 5 years early and save yourself over $38,000 in interest payments. Just think about all the things you could do with $38,000 in your pocket!
Now, you might be thinking, my mortgage payment is already an expensive bill every month, I can’t possibly pay another 10% on top of that. We get it, living expenses are high and they’re only getting higher. But every little bit you pay ahead now is going to have a huge impact down the road. If you paid 5% ahead on that same loan, you would save yourself over $22,000 over the life of the loan. Even just $10 ahead each month will save you almost $9,000 over 30 years.
Our point is, find an amount that you feel comfortable with and set up your monthly payment to include that amount each month. The best system is to set it up to pay automatically. If you have to think about it, you might forget or end up spending that money on something else. If you make the extra amount part of your payment, you won’t even notice it. Before you know it, your bank will be telling you that you’ve paid off your mortgage early and you can treat yourself to a reasonable reward, we said reasonable now… (see our post on Lifestyle creep).