Making Additional Home Loan Payments?
Accelerated Repayment Can Save You Money!
Shave years off your loan and save money by paying more than your regularly scheduled amount. How much money can you save? Find out now. Fill in the following boxes, including the additional amount and the number of times you will make that increased contribution each year.
When you first take out a loan, you're probably not thinking about paying it off early.
After all, you designed your payment schedule to suit your income and your lifestyle — so why mess with success?
Because things change, that's why. You were expecting your income to increase with time, but what if you get laid off, an unforeseen promotion, a better offer from a different company, or a windfall from selling off your collection of vintage ketchup packets on eBay — you never know what the future holds.
In these fast-paced times, it's sometimes difficult to predict your financial future for the next 30 days, let alone 3 decades.
Paying Extra On Your Monthly Mortgage Payments
Without a doubt, paying extra is a good thing. It helps you pay off your debt a lot sooner, and save you a bundle in interest — but is it right for your future plans, and how much more should you pay?
Let's say you get a sizeable tax refund. Conventional wisdom says you should apply this toward paying off your home quicker, but your spouse may disagree. Oftentimes, an unexpected windfall can best be used for home improvements, which will help with your capital gains tax exemption down the road, or for home and auto repairs, which may be sorely needed.
Some say you shouldn't even waste time pondering what to do when you come into extra money and you should sent it straight to your lender. In any case, any additional funds you send them should be specified to be applied toward your principal.
If you don't specify, they might just apply your contribution toward your future scheduled monthlies. If that happens, you won't save a penny, but the bank will be pretty happy.
How Much Money Will You Save?
The short answer is, you will save a lot. In addition to having your home fully paid-off ahead of time (giving you buying power when you need it), you will have saved tens of thousands in interest costs.
Let's turn again to our trusty free online calculation tools to figure out how much time and money you'll save by paying off your home early. You can use the above calculator to show you exactly how much you'll save, to the penny, and even what you'll save in 5, 10, or 20 years from now.
Life has been good to you. Your company increased your salary, giving you about $200 more a month in disposable income. Your envious co-workers may be thinking, "Nice work if you can get it," but you're not going to splurge on frivolous things.
You're going to put that "found money" toward your debt. Well, not all of it, you still need some wiggle room. You've decided to increase your monthly repayment by $125 each month from now on.
First, make sure it's okay with your lender. Some lenders still penalize you for early repayment, although it's not as common as it was a decade ago. If there is a penalty, you're better off investing the money elsewhere, or splurging.
Some penalties are tied only to completing the loan before x years, so some homeowners will continue to apply extra to their principal until the loan is down to a few dollars and then pay a dime a month or such for years until the loan is past the repayment penalty.
In our example, on a $250,000 note over 30 years with a 6.5% rate, we would enter the amount of the extra payment ($125) and how many times a year we plan to make it (12).
BOOM! You just saved $69,932 in interest payments and chopped 5.5 years off the loan term.
The Benefits of Additional Paying
As you can see above, additional payments saves you money and shortens your term without affecting your budget dramatically. You'll reap the most benefit from this if you start early on; during the first few years, most of your payment goes toward interest. Extra contributions early will help build equity quickly.
The earlier you start, the better. As long as you do it faithfully and on time, you can expect to:
- Save an average of $50,000 in interest
- Fully pay off your loan an average of 6 years sooner
- Feel like a million dollars by being debt-free; you get real peace of mind.
- Have more financial freedom and security when you retire.
Paying More Monthly Vs. Additional Yearly Contributions
There are several ways to extinguish your loan early, but the two most popular plans are making fatter monthly payments, or making one extra contribution at the end of the year, which is the same size as your typical payments.
In the latter plan, you end up making 13 monthly payments a year instead of 12, and this appears to be the more profitable pay-off, provided you can discipline yourself into saving up enough.
In the example we used above, paying $125 more monthly reduced the interest by almost $70,000 and brought the loan term 5.5 years sooner. If we apply that $125 toward one lump sum contribution at the end of the year, it works out to approximately one extra monthly payment, but the savings are phenomenal when factored as a 13th payment.
Don't be alarmed at the calculator results as it is just showing your 13th contribution as part of your prior ones; the other contributions remain unchanged.
What changes is your savings! Just with that one-time yearly boost, you saved almost $78,000 in interest fees (compared to $70,000) and you're paid-off 6.2 years earlier (compared to 5.5 years).
Experts agree that paying at an accelerated pace is a relatively painless way to save more of your money and achieve your dreams faster.