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What one more dollar means for your mortgage payment

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Michael Conroy/AP/File

(Read caption) A "Sold" sign is posted outside a home in Indianapolis. Paying even an extra dollar on your mortgage payment earns a steady and safe return over the long haul, Hamm writes.

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Let’s look at a “typical” mortgage. Right now, the average American mortgage is \$235,000, so let’s use that as our baseline. The Seattle Times reports that, right now, the average 30 year fixed mortgage rate is 3.42%.

So, let’s use those numbers. We’ll look at a 30 year fixed mortgage at 3.42% that borrows \$235,000.

Under those conditions, a person will be paying \$1,044.79 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 \$141,123.93 in interest over the course of the loan.

Now, what if a person adds just \$1 as an extra payment each month 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 – a total of \$359 – you save \$626.60 on that last payment.

What if a person adds just \$5 as an extra payment each month for the entire loan? Each month, the total payment is \$1,049.79. What does that look like?

In that case, you don’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 don’t have to make at the end of the loan.

What’s happening here is that 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.

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.)