If you own a home, or are considering owning a home, take this small piece of advice and run with it.
Pay extra.
How much extra?
As much as you can afford.
But before I show you some facts and figures, let me ask you this. Do you file your own taxes? Because if you don't, if you look to the "professionals" to do it, whether that is H&R Block or an accountant or someone else, then you won't have any idea of just how much you are saving (or not saving) by paying the minimum mortgage amount.
So there's two tips. File your taxes (it isn't that hard and I highly recommend TaxAct online for it) and pay more than your minimums on your mortgage. And here are the numbers to really illustrate it for you.
Say you buy a house for $200,000. I live in the Midwest, in Kansas City, and I bought a house for half of that price. I also bought a little bungalow down the street from my big house for $25. But that is another story for another day.
Here in the Kansas City area, $200k will get you a decent house in a decent area. Also, let's peg that percentage rate at 4%. Mine's 3.25% on my big house, but figure 4% in case rates have gone up in the past four years.
So: $200k on a 30 year loan at 4% will cost you $954.83 in Principal and Interest. Say that insurance and property taxes (escrow) adds another $400 per month onto that, making your total payment $1354.83 per month.
If you pay this amount for the next 30 years, you will end up paying $143,709.01 in interest alone. Not to mention paying around $487,738.80 total in payments over 30 years.
I don't know about you, but I can think of many other ways to spend my money that paying on a mortgage for THIRTY years.
But wait, you say, I get a tax write off!
Not $143,709.01 worth of write off, not even close. Maybe...$20k in write offs, but probably far less than that.
So instead, just pay $100 extra per month. That's not a lot, but it means saving $26,824.93 in interest payments. That's a new car! And instead of paying for 30 years, you end up only paying for 25 years. That's FIVE years or $81,289 worth of payments you DON'T have to make.
Or how about $200 extra per month?
Paying $200 extra per month means that you save $44,839 worth of interest alone. Instead of 30 years, or even 25 years, you are now paying your mortgage off in just 21.5 years and saving a total of $138,192 in payments.
Now let's throw in some tax return money...or annual bonus...or whatever. Just $1,000 per year.
That brings you down to a total of over $55,619 in savings on interest payments and your 30-year loan is now paid off in 19 1/2 years. Saving you over 10 1/2 years worth of payments.
If you aren't paying more than your minimums, then you are cheating yourself of tens of thousands of dollars.
So peg that loan, start paying extra, and save tons of money!
You always have to pay the principle off in full, so I'm not sure how you can pay $44,000 less in interest and yet save a total of $138,000 in payments. But my main comment here is that this is a good idea if you don't have a better investment for that money. For instance, if you have any credit card debt at more than 4% (the mortgage rate), then you should be paying that off first from what I can tell, because that interest will be accumulating faster than what you're saving with the house interest. Likewise, if you can earn more than 4% elsewhere (or believe you can), same sort of thing.
On the other hand, in an age of economic uncertainty and people losing their homes, there is a secondary value to just getting the house paid off in spite of other opportunities, so this is something someone needs to consider for themselves.
Downvoting a post can decrease pending rewards and make it less visible. Common reasons:
Submit