Making just one extra mortgage payment can save you thousands! Paying extra to save may sound counter-intuitive, but the fact is that just one payment can make a huge difference in the total cost of your home’s mortgage (and also shave years off the payment period!)
To illustrate this, take a look at the following example:
Jill has a $200,000 30 year mortgage with a 6.5% interest rate. Her monthly payment is $1,264 per month. This means the total interest paid on her loan will be $255,088.98, leaving Jill with an overall bill of $455,088.98.
However, if Jill has the same mortgage and terms but pays an additional payment of $1264 per year, the total interest paid drops down to $199,098.92 with an overall bill of $399,098.92! Not only will Jill cut into the amount of accrued interest, but she also reduced the pay off date.
By just adding an extra monthly payment per year, Jill saved herself nearly $56,000 and paid off her loan 6 years early!
Where Can You Get An Extra Payment?
Paying an extra month per year is a great way to save money in the long run, but for many it can be hard to realigned budgets to make it work. Paying an extra $1264 per year can be difficult to stomach — especially if you aren’t required to! However, there are ways to do so without really even noticing you are!
- Keep a consistent budget: Most people are paid every two weeks, leaving them with 26 paychecks per year. For your mortgage, you only need to make 12 payments per year. If half of your paychecks go towards paying off your mortgage, you are left with two full paychecks that aren’t touched by your mortgage. These may have once been your “splurge fund,” but if you consistently divide all of your paychecks, you are likely to have an additional month’s mortgage payment on hand without noticing it.
- Change your payment schedule: Two times per year, you will be given three paychecks per month instead of two. These “extra” paychecks can easily be applied to your mortgage. In fact, many mortgage companies will allow you to set up and use a bi-monthly payment schedule that will withdraw half of your monthly payment every two weeks. You will be paying 13 payments without ever noticing a drop in your paychecks! Make sure, however, that your lender allows you to apply this additional amount paid