The power of one extra payment can shave off 5-7 years
Making one extra payment per year towards the principal balance of your mortgage can significantly accelerate your path to debt freedom. With this strategy, you're effectively reducing the outstanding balance faster, which in turn lowers the amount of interest accrued over time. This extra payment directly chips away at the principal, diminishing the duration of your loan. On a typical thirty-year mortgage, implementing this approach could shave off a substantial 5 to 7 years from your repayment timeline. Not only does this shorten the lifespan of your loan, but it also means you pay less in interest overall, potentially saving thousands of dollars in the long run. It's a simple yet powerful tactic that empowers homeowners to take control of their finances and achieve homeownership freedom sooner than expected.
Consider this.
Let’s say you have a 30-year fixed-rate mortgage on a $350,000 home with a 6% interest rate. Your regular monthly payment is $2,098.
Pay-off date: January 2054
Total interest paid: $405,434
Total cost of the loan: $755,434
See how the total interest ends up costing more than the purchase price of the house? Ouch.
If you make an extra monthly payment of $2,098 each December, you’ll pay off your 30-year mortgage five years ahead of schedule and net about $87,375 in interest savings in the process.
Pay off date: January 2049
Total interest paid: $318,059
Total cost of the loan: $668,059
You read that right: $87,375 in interest savings.
But we realize that coughing up $2,098 around the holidays is tough.
So instead let’s imagine you increased your mortgage payment by 1/12th ($175) each month. With the same 6% interest rate, you’d end up paying $2,273 instead of $2,098.
The results are nearly identical, although making an extra mortgage payment at the end of the year saves you more money on interest.
Pay off date: January 2049
Total interest paid: $319,441
Total cost of the loan: $669,441
As you can see, those extra monthly payments pay off. To figure out your own potential savings, use an amortization schedule calculator. Full Article on The Penny Hoarder
