Making a monthly extra payment to your mortgage will not only save your thousands in interest but will ultimately make you a free and clear home owner years earlier than the bank would like.
interest.com ran a few numbers on a 30 year, 4%, $200,000 mortgage and here are the results:
Extra Payment Years Reduced Interest Saved
$100 4 years, 11 months $26,854
$200 8 years, 5 months $44,922
$300 11 years $58,009
It might seem surprising that an extra $100 a month can save you almost $27K in interest. This happens because you’re basically limiting the compounding effects of interest through extra payments. Just imagine what not eating out 2 or 3 times per month can do for owning your home outright.
Freedom Financial Asset Management shares a few tips on how to get started making an extra payments the smart way.
Set It On Auto-Pilot
Adding a little extra to your mortgage payment each month usually means setting up payments to the bank that owns the mortgage.
Mortgage payments are actually a bundle of payments. These payments cover your mortgage principal plus interest, home insurance, taxes, and can include a few other items. The type of account setup to handle this bundle of payments is called an escrow. It isn’t anything you need to set up. Often it is handled through your home insurance company or the mortgage company.
By going directly do to the lender, you can usually setup an auto draft on top of your regular mortgage payment. This way the escrow bundle doesn’t have to be involved. But check with your bank or home insurance company first to be sure.
Round It Up For Smaller Payments
If a $100 a month payment sounds like too much but you still want to add an extra payment, Freedom Financial Asset Management says one way to get started is to simply round up your payment. If your mortgage is $1450, then pay the extra $50 to make it $1500. No matter what the difference is when you round up, you’ll always be paying less than $100 extra per month.
If for some reason your mortgage is already rounded up (i.e., $1500), then start with $50 extra and try to increase it over time.
An added benefit of paying extra on your mortgage is that you’ll remove private mortgage insurance (PMI) sooner. PMI doesn’t help your financial situation at all. It benefits the lender, not you.
Freedom Financial Asset Management explains that PMI is used when your down payment is less than 20% of the home’s value. It can also be used when you refinance a mortgage with less than 20%.
If you are able to handle larger extra payments just to get rid of PMI, you’ll be able to increase your monthly cashflow by the amount of PMI you’re paying every month. Once your equity goes above 20% of the home’s value, PMI will be removed. At that point, you can back down your monthly extra payment if needed.
If you are struggling with debt or need a small loan to help you through a rough patch, Freedom Financial Asset Management could assist you with the right financial product for the job. You can visit them at freedomplus.com.