Mortgage payments accelerated by paying extra principal

Extra mortgage payments won’t lower your monthly note, but will speed payoff

Buying a house is one of the most expensive things most Americans will ever do. The typical home costs several times one’s annual income, the payment schedule runs nearly 30 years, and the owner will pay twice the cost of the house in interest alone over the life of the typical loan.

And yet, we buy houses because we need a place to live. So, expensive as it may be, we make the purchase and grumble every month when we make the payment.  No one wants to pay for a house for 30 years; we would all like to get out from under our mortgage sooner if we could. One way to do so is to pay more each month than the amount required.

The typical mortgage payment includes interest, a portion of the loan principal and taxes and fees. During the first years of the mortgage, the amount of principal in each month’s payment is quite small; it might literally be less than $100 on a $1000 payment. The rest is interest and taxes. Over the life of the payment schedule, the amount of principal will gradually increase while the amount of interest gradually decreases. At some point, the two will meet and switch places as the principal becomes a larger and larger portion of the payment amount.

By paying even a small extra amount each month, the life of the loan can be dramatically shortened. On a $200,000 mortgage at 6.5%, the monthly interest and principal will be about $1200 and payment will take 30 years. By adding as little as $50 per month, the repayment schedule will be reduced by about three years. Better than that is the fact that the amount of interest paid during that time will be reduced by about $33,000.

The downside to this, if there is one, is that paying extra will not reduce your monthly payments, even if you do so from day one. The payment schedule is fixed; paying more this month or this year will not reduce the size of the payment next month or next year. So be sure that when paying extra you can afford it, because that extra amount is gone.

In times of economic boom, when interest rates are high, it may not be a good idea to pay off the mortgage early. If you have a loan at 5% and you are earning 20% on your money in the stock market, you would be better off investing that extra $50 per month that you might apply to the house payment. On the other hand, many people like the peace of mind that comes from being free from a 30 year obligation. It’s hard to put a price on that. Given that interest rates have been fairly low for the past five years or so and investments are unlikely to pay 20% per year again anytime soon, paying a bit extra on the mortgage can probably be considered good advice for most any homeowner. It is certainly a better idea than taking out a home equity loan to buy a recreational vehicle.

A little extra each month goes a long way towards paying off your property. Give it some thought.