What one more dollar means for your mortgage payment(Read article summary)
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, Hamm writes.
Letâ€™s look at a â€śtypicalâ€ť mortgage. Right now,Â the average American mortgage is $235,000, so letâ€™s use that as our baseline. The Seattle Times reports that, right now,Â the average 30 year fixed mortgage rate is 3.42%.
So, letâ€™s use those numbers. Weâ€™ll look at a 30 year fixed mortgage at 3.42% that borrows $235,000.
Under those conditions,Â a person will be paying $1,044.79 per month for the next 360 months. Thatâ€™s assuming they make the minimum payments on that mortgage over the entire term. They end up paying a total of $141,123.93 in interest over the course of the loan.
Now, what ifÂ a person adds just $1 as an extra payment each monthÂ for the entire loan? Each month, they pay $1,045.79. What changes?
Well, the final payment drops to $419.19. By putting in just $1 extra each payment â€“ a total of $359 â€“ you save $626.60 on that last payment.Â
What ifÂ a person adds just $5 as an extra payment each monthÂ for the entire loan? Each month, the total payment is $1,049.79. What does that look like?
In that case, you donâ€™t even need to make your last two payments, and the payment before that is only $25.20. Over the course of the loan, you pay in $1,785 extra, but you end up with $3,109.17 in payments you donâ€™t have to make at the end of the loan.
Whatâ€™s happening here is thatÂ every dollar you pay extra on your mortgage effectively â€śearnsâ€ť interest at a rate equal to your mortgage interest rate for the rest of your mortgage.
So, if you pay $1 extra on that first payment, your dollar will earn a 3.42% 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.)
Could you do better than that with your dollar? Thatâ€™s a better return than your savings account will give you right now. Itâ€™s better than inflation right now, which is below 3% by most calculations. Itâ€™s probably not as good as the return youâ€™d get 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 isÂ 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 donâ€™t have a productive use for that money, it makes sense to simply add it to your mortgage payment. It earns a steady and safe return over the long haul.
It doesnâ€™t take much to add up to a big difference as long as you keep doing that little thing regularly.
The postÂ How Much Impact Does a Tiny Extra Payment Have on Your Mortgage?Â appeared first onÂ The Simple Dollar.