The benefit of additional mortgage payments

Adding just $100 more per month to a mortgage payment can have a significant impact on debt, a financial expert said.

NEW YORK – Mortgage rates may be on the decline, putting new homebuyers in a better position than they were a year ago. The 30-year fixed-rate mortgage hit a high of 7.79% at the end of October 2023; now, we see this type of mortgage at an average of 6.38% (forecast for the fourth quarter of 2024).

If you bought a home last year, it’s probably too early to think about refinancing, but have you considered the benefit of making extra payments to lower your interest amount and shorten the loan term?

The good news is that mortgage amortization calculators are available online, so you can test making extra payments to see what benefits can result.

Thanks to the math of compounding, you don’t have to make big sacrifices to make a significant impact on your debt.

Here’s an example, using an online mortgage amortization calculator (in this case, I’m using one found at calculator.net).

Let’s say you have a 30-year, 5.5% fixed-rate mortgage with a balance of $250,000. Your regular payments would be $1,419.47. In 30 years (October 1, 2054), you will have made 360 payments of $1,419.47 for a total of $511,010. From this amount, you would have repaid the loan of $250,000 and paid the bank interest of $261,010.

What if you just added $100 more to your monthly mortgage payment each month, bringing it to $1,519.47? You would pay off your $250,000 debt four years and five months earlier, saving you $44,877 in interest payments.

Of course, the more you add as an extra payment, the bigger the savings.

If you could make an extra payment of $500 per month ($1,419.47 plus $500), you would save 13 years and five months of payments and $129,580 in interest payments. Your total interest payments will be reduced from $261,010 to $131,430.

Another alternative is to make occasional payments. Let’s say you get an annual bonus check every January. For the next three years, every January, you pay the bank an additional $10,000. This cuts about $90,000 off your interest payments and saves you seven years off your loan, so your loan will be paid off in full by October 2047 using Freddie Mac’s Extra Payment Calculator.

But if you wait to use those $10,000 bonus payments until January 2034, 2035 and 2036, your savings will be about half as much — just $48,860, saving four years and seven months instead of seven years in the example previously, illustrating the time value of money.

You can probably find a good prepayment calculator on your bank’s website. If not, you can call the bank and ask them to illustrate some prepayment options for you given your loan.

Worth considering? Absolute. Personal debt reduction is the name of the game in today’s financial market. Making small sacrifices today can add up to huge savings in the long run.

Who should not make extra payments? Someone with high-interest consumer debt. If you have high-interest credit card debt, pay it off first. Then tackle your mortgage.

who else? If you don’t happen to be contributing to your 401(k) plan at work, even if it has a match (hopefully not you), it’s better to put some extra money in there first.