One extra payment each year means big savings on interest
Owning a home is great, but paying a mortgage for 30 years can seem like forever. Luckily, there’s a trick you can use to be free of your mortgage years earlier. Simply add 1/12th of a payment extra to each month’s mortgage payment.
Here’s what you need to know:
Why you should add a payment each year. “If you can afford to do it, making an extra payment each year just makes sense,” says Mark Olsen, Vice President Area Sales Manager for Independent Bank. “You’ll save thousands of dollars in interest by adding to the principal each time you make a payment.” And it doesn’t matter if you make the payment all at once or break it up into 12 equal amounts that you add to each month’s mortgage check.
How to do it. Say you have a $150,000 mortgage (the median home cost is about $190,000). With a 30-year mortgage, you’d pay about $700 a month before taxes and insurance for your home, and you’d pay nearly $108,000 in interest. But add an extra $59 a month (about 1/12th of $700) to your payment and you’ll pay off your home nearly eight years sooner and save over $16,000 in interest. (The calculation assumes a 4% interest rate.)
When you should skip it. “If you’re paying down high interest debt, you’ll want to put off making that extra payment until you’ve accomplished your goal,” says Olsen. “That’s because paying 22% interest on credit card debt could potentially cost you a lot in interest if you make only minimum payments.” Once you’ve finished paying down that debt, you can switch that extra cash to your mortgage payment.
Equal Housing Lender