Increase Mortgage Payments Above Minimum
If you had a 30 year fixed mortgage of $300,000 at an interest rate of 6.00%, you’d pay $1,798.65 each month or a total of $647,515.44 over the life of the loan. That’s $347,515.44 in interest over 30 years, or about $10,000 in interest each year (given amortization, you pay more of that interest in the beginning of the loan but the principle still applies).
What if you paid an additional $50 a month? You’d shave $29,211.36 off your total payout (this includes the extra $50 a month) and close out your mortgage 25 months early.
What if you paid an additional $100 a month? That’s a savings of $53,346.83 and be done 47 months early - nearly four years.
If you opted to send an even $2000 check each month (an extra $201 payment), you’d save $91,499.07 and close out the mortgage in 279 payments - or 82 months early.
Want to see your particular situation? Put the numbers through this mortgage loan calculator at Dinkytown.net and see for yourself. It makes a huge difference if you are able to do it.
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11 Comments - Share Your Thoughts
So few people actually have mortgages with rates they couldn’t beat elsewhere (accounting for the interest tax deduction) I find it hard to believe this is truly in anyone’s best interest, assuming they have the fortitude to invest the incremental $50 a month.
I think the main reason to pay down your mortgage is psychological. There are lots of people who like to own their house free and clear. I’m not one of them myself. Like many people who has gotten a loan in the last couple years, I can beat my after tax rate on my loan with other investments.
I’d rather not have the debt hanging over my head.
Not counting the extra grand I throw at it from bonuses and such, my average extra monthly contribution gets me paid off w/$80k less in interest and paying it off 10 years early. My goal is to pay it off in 12-15 years, but I figure at our current rate it will probably be about 18 years.
Of course, once my wife gets out of school and starts working, we’ll be able to accelerate things more than the extra $200/mo.
Blaine,
Given the choice, would you prefer to have no debt, and no assets, or $11 in assets and $10 in debt. Not saying that there is a right and a wrong answer (I think this is a derivative of a risk tolerance question).
I’m paying a little extra per month but I want to save up for other expenses. If I had nothing on the horizon I’d probably pay as much as I could toward the mortgage debt.
Another thing to consider: Dollars are worth less every day. A fixed-rate mortgage is one place where inflation actually works in your favor! Paying off the debt is very good, don’t get me wrong. But that fixed payment of $1,798.65 is worth $1,744.69 in today’s dollars next year. In year 30 it would be worth $721! You miss out on the inflation if you pay off early.
I expect nothing but inflation in this country until the sun falls to earth.
BTW I was assuming 3% annual inflation.
Like anything else, I like to diversify in this area. While I pay a little extra into our house each month, I don’t put in everything I could. It used to be I’d pay $100/extra per month but that’s forfeited for the entire time I own the house (which I plan a long time) so I cut that down to about $30/extra now and put the other money into auto-invest in other funds. I earn a certain 5% return on the extra house payment. The funds are volitale but lately have been coming out way ahead so, for now, I’m glad I scaled down my mortgage pre-pay amount.
To me, 30 years seems like forever. I won’t really see the results of paying the mortgage off early at this stage even taking a couple of years off the end of the mortgage isn’t sufficient incentive.
Also, I can get a better return on investment just by saving extra money in a savings account. 6.5% interest on savings, compared 5.48% interest on mortgage. The mortgage interest is not tax deductible and the savings interest is tax-free (different tax regime).
Watching a pile of savings grow out of practically nothing really motivates me. So for me this is a no-brainer, it works strictly on the figures, and it suits me psychologically as well.
Unfortunately I don’t think the line is drawn that clearly because he’s not throwing every last dollar he has into the debt, just a what he can handle for his financial situation.
I too don’t understand the point of paying money into a house. When you pay money into a house, that money just sits there as if it were under mattress. It doesn’t grow, it just sits there locked in as equity until you sell.
If you do an interest only loan and put the rest of your money into investments like well diversified mutual funds or even high yield CD’s, savings, you’ll come out ahead. But, you do have to have the discipline to actually save that money and not spend it, and you have to be decent at managing money and investing, in which case this strategy wouldn’t work for everyone.
[...] at Blueprint for Financial Prosperity has an interesting couple of posts about increasing your mortgage payment above the minimum. This topic occasionally comes up and usually generates a good number of comments. Generally, [...]
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