I love this topic because it feels so good to get this big of a bang for your buck. Did you know that if you have a 30 year mortgage, the total amount you pay can be more than double the amount of your original mortgage because you’re paying over such a long period of time? For the record, I’m a fan of the 30 year fixed mortgage. I’m a bigger fan of a 15 year fixed mortgage, but you’re safe as long as your interest rate is fixed and 30 years or less.
Let’s look at some key factors in a sample mortgage (my favorite mortgage calculator):
| Mortgage Amount | $100,000 |
| Mortgage Duration | 30 years |
| Monthly Payment | $536 |
| Interest Rate | 5% |
| Total Interest Paid | $93,255 |
| Total Amount Paid (Principal & Interest over 30 yrs.) | $193,255 |
| Total Payoff Time | 30 years |
You can see you’re paying almost double the amount of the loan ($193,255 compared to the original loan amount of $100,000) over the 30 year duration. Ouch!! What happens if you pay one extra payment per year, say at annual bonus time? Use my favorite ‘extra payments’ calculator to calculate your personal situation.
Let’s work the same sample paying ONE extra payment per year:
| Mortgage Amount | $100,000 |
| Mortgage Duration | 30 years |
| Monthly Payment | $536 |
| Extra Payment Made Once/Year Over Life of Mortgage | $536 |
| Interest Rate | 5% |
| Total Interest Paid | $74,584 |
| Total Amount Paid (Principal & Interest over 30 yrs.) | $174,584 |
| Total Payoff Time | 25 years |
| Amount Saved | $18,671 |
| Time Saved | 5 years |
You can see in this example, the person’s total amount paid is far less: $174,584 compared to $193,255 (from the example above). The person saves $18,671 and most importantly, she saves 5 years of payments.
Having your mortgage paid down earlier is a huge benefit especially if you’ve got kids in college at the time you stop having to pay mortgage payments or at retirement. Think how much more comfortable your life would be without having to write that check each month. It can change your whole financial picture.
If you get a tax refund, annual bonus, or save a little each month, you can probably muster one extra payment to save yourself years of mortgage payments and thousands of dollars (potentially hundreds of thousands). Just sayin’…