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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  • Steve from Sacramento

    Excellent advice. The quicker you pay off your mortgage, the better. Don’t listen to the financial experts who urge you to take that extra money and invest it as you’ll earn more than the interest rate on your mortgage. Good luck doing this in today’s volatile market. And don’t buy into the tax deductible interest argument either. The sooner you pay off your mortgage, the sooner you’ll be living “rent-free” in a house you own outright. This is the ultimate peace of mind. We did it and have never regretted it for a second. Today we have retired friends still struggling to make monthly mortgage payments. That’s insane.

  • TGAinCMH

    Not good advice; much too simplistic. Many people today have very low interest rate mortgages. They would be much better served over the long haul to invest that extra money. Even a moderate investment of 6-8% is still better than what you are saving on a 3-4% mortgage. Plus you need to factor in how much you lose in future tax deductions by paying off faster. And if you have credit card debt (usually in the 12-19% range), it should go without saying paying THAT should be priority #1. A low interest mortgage is cheap money; find better ways to invest than paying that off early.

    • Ted

      Again, excellent advise. Paying off a mortgage is a zero (0) risk move, with a 100% return rate on your dollars scenario. Compare that to investing in securities where the rate of future return is based on the whims of the market and there is a high risk of loss of value. If you plan to own a house and commit to a mortgage without defaulting, then making additional payments only makes sense. Financial institutions depend on people living beyond thier means. The less one finances, the more one owns. The more one owns, the more worth one has, irrespective of a speculative stock market that benefits the stock analysts and day traders.

  • Anonymous

    The wealthy have Mortgages even though they could easily afford to pay off a mortgage (reference Facebook CEO who recently purchased a home).