Paying Down Your Mortgage

When it comes to paying bills, a mortgage, for most of us, is the single largest bill we pay.   Have you ever considered paying more than you owe each month?

If you take a typical  30 year, $200,000 mortgage at 6% interest and pay the required amount over the 30 years period you will own your home outright.  We all understand that concept, but how much would you have paid for the house?   Believe it or not, you would have paid $431,676.38.   If you want to verify this, just run a loan amortization schedule template that comes with Microsoft Excel.

You have paid more than double the cost of the house back to the bank to own your house.   No wonder banks make lots of money and people end up living from paycheck to paycheck.   

The option to buy a house for cash, just isn't practical in today's market, even with the cost of houses dropping. The alternative is to pay a certain extra amount each month, in which case you can dramatically reduce your cost.   In most states, banks are not permitted to charge a prepayment penalty, therefore you are allowed to do this and the mortage holder is required to lower the principal amount by the amout of your excess payment at your direction.   Be sure your state has such a law and that there isn't a penalty in your mortgage agreement before setting out on this plan of action.

Assuming you are safe to make extra payments, you might ask how much an additional $100 a month will really save you.  Using the same financial calculator the answer is: $49,138.41.  Isn't that amazing?  All you did was pay $100 a month extra and you saved almost $50,000 over 30 years.  To be precise, you saved that money over the course of 24.6 years, because by that time the house is paid off early.   Yes, you turned a 30 year mortgage into a 25 year mortgage.  So while your neighbor is still making their payments for another 5 years, you can take that $1,200 per month and put it toward something else.

Another benefit of paying down your mortgage in this market is the interest rate benefit.   What do I mean by that?   Well, the average person will perhaps take that extra $100 they have per month and put it in their savings account.   What interest rate are you getting there?   At best you might be earning 0.5% (if so, tell me what account you have, because it's a high interest account) on your money.  If you put $100 into your savings account, then after a year you have $100.50 including interest.

If instead, you took that $100 and paid it against your mortgage, you would have saved $6 for that year.  Saying it a different way, by putting your $100 into your mortgage "savings account" at 6%, you saved $5.50 more than you would have with the same money sitting in your personal bank account ($106-100.50).  

Keep in mind that once you "save" that $100 into your mortgage account, you can't take it out, like you can with a regular savings account, but maybe that's a good thing, right?   With that in mind, you should consider having an "emergency fund" available to you should you face any unforseen financial difficulties were the mortgage payment would not be available.

Give serious consideration to paying a certain amount extra toward your mortgage every month.  Make it a habit and watch the months and years come off your mortgage much faster.

Maybe you can afford more than $100 per month and maybe you just can't. Perhaps your monthly mortgage payment is $1,187 per month, why not round your payment up to $1200.  Even that small amount will save you over $7,000 and 11 months off your mortgage.

Be creative, if you get a bonus, put some of that toward your mortgage.   Get a tax refund, how about the same?

This is an excellent way to build equity, especially in tough times.