Homeowners are always looking for ways to pay off their mortgages early and, in the process, save money on interest.
Adding even small amounts of extra principal each month can add up to huge savings over time.
Although prepayment penalties are less common these days, and illegal in many states, if you have one in effect or think you do, check your loan documentation or consult with your mortgage professional before making any prepayments.
So what are your options?
The following numbers show the savings that can result:
A $100,000 loan, fixed for 30 years with a 5.5% interest rate, excluding property taxes, homeowners insurance and mortgage insurance, will have a monthly payment of $567.79.
If the loan were to be paid off in 30 years (360 months), you will have made payments totaling $204,404.40.
One Extra Payment per Year, Over 12 Months
Adding another $47.32 ($567.79 divided by 12) as principal to your payment each month will take roughly five years off of the end of the mortgage.
You would make 298 payments of $615.11 and one payment of $574.66, for a total investment of $183,877.34 – a savings of just over $20,500 compared to the 30-year counterpart.
One Extra Payment per Year, Once per Year
If you were to pay one full extra payment every 12th month, starting at the end of the first year, you will have paid $184,637.26 – a savings of just over $19,700 compared to the 30-year counterpart.
Pay It Off in 15 Years
Payments of $817.08 per month for 15 years will pay off the loan as well, the total expense being $147,074.40 – a staggering $57,330 less than the 30-year counterpart.