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What Just $1 Extra on Your Mortgage Payment Can Do!

May 14, 2013

Let’s look at a “typical” mortgage. Right now, the average American mortgage is $235,000, so let’s use that as our baseline. The Seattle Times reports that, right now, the average 30 year fixed mortgage rate is 3.42%.

So, let’s use those numbers. We’ll look at a 30 year fixed mortgage at 3.42% that borrows $235,000.

Under those conditions, a person will be paying $1,044.79 per month for the next 360 months. That’s assuming they make the minimum payments on that mortgage over the entire term. They end up paying a total of $141,123.93 in interest over the course of the loan. Now, what if a person adds just $1 as an extra payment each month for the entire loan? Each month, they pay $1,045.79. What changes? Well, the final payment drops to $419.19. By putting in just $1 extra each payment – a total of $359 – you save $626.60 on that last payment. What if a person adds just $5 as an extra payment each month for the entire loan? Each month, the total payment is $1,049.79. What does that look like?

In that case, you don’t even need to make your last two payments, and the payment before that is only $25.20. Over the course of the loan, you pay in $1,785 extra, but you end up with $3,109.17 in payments you don’t have to make at the end of the loan. What’s happening here is that every dollar you pay extra on your mortgage effectively “earns” interest at a rate equal to your mortgage interest rate for the rest of your mortgage. So, if you pay $1 extra on that first payment, your dollar will earn a 3.42% return tax free over the next twenty nine years and twelve months.

 

Source: http://www.csmonitor.com

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