calculating mortgage payments

Many homeowners look forward to the day when they can finally make the final payment on their mortgage loans. Because many mortgages are taken out for a period of 15 or 30 years, it can be incredibly satisfying to achieve that goal.

But, it can be even more exciting to realize you can reach your goal in a faster time without putting yourself in a financial bind.

A little goes a long way

All your lender wants to ensure is that you can afford to repay a mortgage loan note each month. While the regular payment amount is entirely acceptable to your lender, making a few extra payments in a year can be highly beneficial to you.

A common myth is that a few extra payments won’t make a difference on a several-thousand-dollar loan, the reality is you can significantly reduce the time it takes you to be mortgage-free. Regardless of your mortgage rate, one additional payment toward your mortgage can ensure your time is cut down significantly over the life of your loan.

If your loan note each month is $1,000, and you pay that one extra payment each year over the life of a 30-year mortgage, you would have paid $30,000 faster — not more — toward the loan. These additional payments can shave years off of your actual loan term, allowing you to pay off your mortgage early and save big time on interest.

As a proof-positive example, we can look at a typical mortgage loan’s terms to find out what the extra payment in a year can mean for your payment process:

Your Mortgage Loan Total: $300,000
Interest Rate Paid: 5% ($15,000 annually)
Loan Term: 30 years
Monthly Payment Amount: $1,610

If you pay an extra $1,610 a year, you will pay only $230,731 in interest charges and complete your loan payments in 25 years. This trims five years off of your original payment duration had you not paid the one extra payment. You will also save $68,908 in interest charge over the life of the loan. Surely there are a lot of things you can do with almost $70,000 than pay it to a lender.

Knowing is half the battle

Now that you know what is possible when making just one extra mortgage payment a year, imagine the results of paying even more than that on an annual basis.

While it is true that many consumers are still living from one paycheck to the next, it is still possible for you to ‘find’ that extra cash necessary to benefit you in the long run.

You can technically make the additional mortgage payment at any time so plan to save the cash you need over the course of the year. If you think you can only swing the $1,610 payment, divide that amount by 12. You will need to save $135 a month or $34 a week.

Saving weekly may seem more manageable and might make it easier to see where the money can come from to go into savings. You can cut back on a few weekly groceries, avoid eating out at restaurants, or cut out expenses like dry cleaning services or expanded cable packages. There are plenty of ways to save $34 a week you just have to be committed to doing so.

If you can achieve the extra payment in one year, strive to do better for the following year. Aim to save double so you can submit two additional payments.

You may also want to consider tacking on additional money to your monthly payment. If you are responsible for paying $1,610 a month for your mortgage, round up the number to an even $1,650 each month. Write that number in your budget and consider it your typical mortgage payment moving forward. Using this formula, you can cut off two years from your loan term.

Focusing on your mortgage payoff is an important investment into your future. You are earning the equity in your home and putting more cash back into your own pocket which can be banked and help secure your financial future.

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