Do you know how much your total mortgage costs? Did you know you could easily reduce that amount?
Let’s look at a typical mortgage, According to Capital Economics analysts the average American mortgage in 2012 was $235,000 while most people take a 30 years mortgage. The national average of 30 years fixed rate mortgage is currently 4.13%.
Under those conditions, a person will be paying $1,139.61 per month for the next 360 months. That’s assuming they make the minimum payments on that mortgage over the entire term. They end up paying a total of $175,259.60 in interest over the course of the loan.
What if a person adds just $1 as an extra payment each month for the entire loan? Each month, they pay $1,140.61. Will that make a difference? Well, the final payment drops to $429.99. By putting in just $1 extra each payment you save $710.62 on that last payment.
What if a person adds just $10 as an extra payment each month for the entire loan? Each month, the total payment is $1,149.61. What does that look like?
In that case, you don’t even need to make your last five payments, and the payment before that is only $1006.02. Over the course of the loan, you pay in $3,600 extra, but you end up with $5,831.64 in payments you don’t have to make at the end of the loan.
This about it this way, every dollar you pay extra on your mortgage effectively “earns” interest at a rate equal to your mortgage interest rate for the rest of your mortgage. This is a great saving plan and more than that it is TAX FREE!!!
Yes, you heard it right, if you pay $1 extra on that first payment, your dollar will earn a 4.13% return tax-free over the next twenty-nine years and twelve months. (You receive that return in the form of having the home paid off earlier than you otherwise would or if you sell the house before the mortgage is finished.) That’s a better return than your savings account will give you right now. It’s better than inflation right now, which is below 3% by most calculations. You could get a better return in the stock market over that period, but the stock market also causes risk and it also has tax implications.
The question you really have to ask yourself is will you miss that extra dollar or that extra five dollars? What would you do with it that would really make an impact in your life?
If you could live with $1 or $10 less every month, it makes sense to simply add it to your mortgage payment. It earns a steady and safe return over the long haul.
It doesn’t take much to add up to a big difference as long as you keep doing that little thing regularly.