Just a small amount in extra mortgage loan payments can add up to thousands in savings
The question of paying off loans and interest rates came up at a restaurant with friends last week. I’m in no hurry to pay off my mortgage at about 4.25% but another friend still had an old loan at a much higher rate. He didn’t think it would make much difference to make extra mortgage loan payments so I decided to see how fast he could actually pay the loan off with different payments.
Putting four scenarios together for extra loan payments, I was pretty surprised at the result. I know a few people that have made bi-monthly payments, splitting their payment in half and paying every two weeks, but even adding just a little extra each month can make a mountain of difference.
Interest Savings from Making Extra Mortgage Loan Payments
The Mortgage Bankers Association reported recently in its weekly survey for home loans that the average new home costs $328,370 across the country. Coming from Iowa, that seems a terribly lot to pay for a house but I’m not gonna judge. On 20% down and a 30-year loan at 3.77%, your payments on the $262,700 mortgage loan would come to $1,220 per month plus any extras like mortgage insurance. I got the mortgage rate from a quote on Lending Tree, which provides mortgages and refinance loans through their online service.
The graphic shows four mortgage payoff scenarios.
- Pay the mortgage loan off on-time with minimum payments
- Add just $15 a month to your loan payments
- Split your loan payments in half and pay every two weeks
- Add an extra $208 to your monthly loan payments
Paying your mortgage loan off over 30 years means paying a whopping $176,352 in interest! That’s just the cost of the loan! Adding an extra $15 a month, less than a meal at most restaurants, will save you more than $5,700 in interest and your mortgage loan will pay off nine months earlier.
The real magic starts when you pay bi-monthly because you’re actually making an extra payment each year. Paying every two weeks means you’ll make 26 half payments, or 13 full monthly payments, each year to your mortgage loan. You’ll pay the loan off four years earlier and save $26,832 in interest.
Go all out and pay an extra $208 per month ($2,500 in extra mortgage loan payments per year) and you’ll save $46,465 in interest and take seven years off your loan!
Where does the extra $208 a month come from to make those extra mortgage loan payments? We looked at five easy ways the average family can save $2,500 a year in an infographic last week, simple ways to save like cutting the cable cord and one way to save nearly $600 on your clothes budget.
You don’t have to rush to pay off your mortgage loan, especially if you have a low interest rate, but just paying a little extra each month can save you a bunch of money over time. You don’t necessarily even have to commit to a certain amount each month. Keep a Mortgage Loan Jar where you throw your spare change and use the money to make extra loan payments each month for big savings!