For example, if you have a $150,000 mortgage, just cut all of my dollar amounts in half. The years stay the same.) In this $300,000 mortgage at 5% you would still pay almost $280,000 in interest over 30 years, for a total cost of nearly $580,000 (and you thought you were lucky not to have to pay half a million dollars for your home).
Since the low interest rates are not typical, let’s assume you buy the same home (or bought it already) at 7%, which is still a low interest rate historically. You would pay almost $420,000 in interest. That’s right, the interest cost more than the whole house! You will have paid a total of $720,000 for your home! Ouch! If you really want to get depressed, realize that you had to earn almost $1 million before taxes to bring home the $720,000 over 30 years to pay off your mortgage. That’s right, you have to earn over $1 million to bring home enough after-tax money to pay $720,000 for your $300,000 home.
So, let’s look at how you can pay off your home early. Obviously, you have to pay more than the minimum payment right? I don’t think it takes a lot of thinking to figure that out. But why don’t more people do it? Is it because they don’t have enough in their budget? Sometimes. But most of us have some extra money, or will have some after we’ve lived in our home a few years. To make my examples more effective, I’ll use the 7% interest rate figure.
The easiest way for most people to prepay their mortgage is to pay half of a payment every two weeks instead of one whole payment every month (after all, you get paid every two weeks). They are effectively making one extra payment each year. For this example, you would pay off your mortgage in 24 years and you would save over $100,000 in interest. How much was that college education for your children that you said you couldn’t afford? If you do decide to pay every two weeks, make sure you don’t pay extra for this service. Most mortgage lenders will set up an automatic withdraw for you for free (this method is basically the same as making one extra payment per year).
Another effective method is to add money to your payment every month. In this example, I estimated the monthly payment to be $2,410 (includes insurance and taxes in escrow). If you round your payment up to $2,500 every month, you would save almost four years and over $63,000 in interest. Combine the two methods and your mortgage would be paid off in 21 ½ years and you would save almost $140,000 in interest. Even if you just round up to $2,450 you would save over $30,000 in interest.
Excited yet? Well there is more. You know those whopping bonuses you receive? You could put that money towards your mortgage, along with any other extra monies you may come across (such as tax return money, etc.). If you add $500 extra once per year to your payment, in addition to paying every two weeks and rounding up to $2,500 every month, you will pay off your mortgage in less than 21 years and save over $150,000 in interest. The more you add every month, the more you save.
Just think, every time you get a cost of living adjustment or a step increase, you could add half of that to your monthly payment. For example, if you get an extra $100 per month from a step increase, then you could use $50 extra towards your mortgage and still have an extra $50 per month to spend. If you continue to increase your monthly payment by $50 every year, you’ll have your mortgage paid off in less than 16 years, and you will have saved over $200,000 in interest. What’s even greater is that once you have your mortgage paid off, you will have all of that money you were spending on your mortgage each month (in this example, $3,250) to do with as you please.
Perhaps it is not possible to do all of these at once, but as you can see, just a little bit extra added to your mortgage will save you at least tens of thousands over the life of a loan. Maybe next time you pay your mortgage you’ll add a little to the principle. Good luck and let me know how it goes.
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