Interest rates recently fell to 3.750% for a 30-year fixed mortgage. This historically low rate has prompted many homeowners to refinance their current mortgages in order to get the lowest rate possible. A coworker recently closed on her home only to witness the new, lower rate literally two weeks later. She thought about refinancing her newly obtained mortgage, but I showed her a quick and simple way to save thousands off her mortgage without paying for a refinance. I’ll share that with you now.
We’ll use my coworker as a case study to make this simple. Let’s call her Jane Dough to protect the innocent. Had she refinanced her mortgage she would have expected to pay loan origination fees, title search fees, closing costs and points, which she has virtually just done. Not a cheap prospect at all.
Jane and her husband, ah, John Dough, purchased their home with a loan for $480,000 at a rate of 4.75% for 30 years. Their monthly payments will amount to $2,503.91. In their first year of payments they will pay $7,406.79 towards the principal and $22,640.13 in interest alone. Looking at the numbers this means that their interest payments will add up to more than three times their principal payments. That’s a lot of money. If they continue with those regular payments at the end of thirty years they would have paid $421,406.60 in interest for a total payoff amount of $901,407.6o, almost two times the original mortgage amount.
So how do they lower the total amount paid without refinancing? They must simply make additional payments above their regular payment consistently. It doesn’t even have to be much to make a big difference. If they paid only $30 extra per month, their total payments would fall to $888,750.87, a savings of over $12,656.73. They would also shave nine months off their loan period.
I crunched through these numbers with Jane and she was surprised at how little it took to make a big difference. Going a bit further I showed her what would happen with an extra $100 payment per month. The total payment would fall all the way down to $862,242.20, a reduction of $39,165.40. I showed her that it would only take $25 per paycheck from both her and her husband, a relatively small amount, to make a big difference. This would also reduce the loan period by two years and four months.
Okay, so let’s be really, really aggressive. What could you do with an extra $200 payment per month? The total amount saved goes all the way up to $71,197.72 and the loan period falls by four years and four months. I understand that an extra $50 per person per paycheck might be a stretch, but for some couples this is doable.
Let’s put this all together for comparison.
| Regular Payment | Extra $30 | Extra $50 | Extra $100 | |
| Total Interest | $421,406.60 | $408,749.89 | $382,223.28 | $350,209.03 |
| Total Paid | $901,407.60 | $888,750.87 | $862,242.20 | $830,209.88 |
| Savings | $0.00 | $12,656.73 | $39,165.40 | $71,197.72 |
| Time Saved | 0 | 9 mths | 28 mths | 52 mths |
The best part about all of this, other than the amount that you can potentially save, is that a longer term mortgage typically carries a lower rate, and if you can’t make an extra payment you can always pay your regular mortgage payment with no worries. Also, depending on what state you’re in and how fast you want to pay off your mortgage, you typically won’t incur any prepayment penalties.
Do you add extra payments to your mortgage? What has your experience been?
See the amortization schedules in Excel here.
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We refinanced our $60K mortgage balance in 2002 and paid $100 extra every month, paid off the house 6/2011. The extra amount paid just became part of our budget, some months if we had extra we even paid more.
Smart woman! And I bet it wasn’t painful.
We refinanced our $60K mortgage balance in 2002 and paid $100 extra every month, paid off the house 6/2011. The extra amount paid just became part of our budget, some months if we had extra we even paid more.
Smart woman! And I bet it wasn’t painful.
I increased my weekly mortgage payments by $26 in January 2011. I realized that my pay had increased by over 10% since I financed my mortgage but I was never able to put extra payments towards the debt, like I initially planned. By increasing the payment, it comes out automatically and makes everything easy. I don’t miss the $26/week.
I’ll be doing this again come January 2012, hopefully increasing the payment by a similar amount.
If the rate drops a lot, I would refinance and use the extra money to pay down the mortgage. I need to talk to my finance guy to see if I can refinance my primary residence. I think it might be underwater so probably not. I don’t want to pay PMI.
I would definitely do the math to see if refinancing would make sense. But for those wanting to pay off their mortgages this is a pretty easy way to reduce the length of your mortgage.
I’m not trying to be rude, but the math is confusing me. If their payment is roughly $2500 how are they paying 46K in interest in the first year? I actively pay more on my mortgage so this is very interesting to me, but I can’t get the math to work.
I’m not trying to be rude, but the math is confusing me. If their payment is roughly $2500 how are they paying 46K in interest in the first year? I actively pay more on my mortgage so this is very interesting to me, but I can’t get the math to work.
Even before we applied for our housing loan, we have already known that paying more than our regular mortgage amount will bring us savings, aside from paying the mortgage in shorter time. If the finances allow it, we pay at least $100 more.
Even before we applied for our housing loan, we have already known that paying more than our regular mortgage amount will bring us savings, aside from paying the mortgage in shorter time. If the finances allow it, we pay at least $100 more.
Wow! I had no idea that a small amount over on the monthly payments made such a difference! I also didn’t think about how a loan is actually for FAR more than you took out over the 30 year life of it. Geez.
It adds up, doesn’t it? Banks make quite a bit of profit from 30-year mortgages. I feel as if it’s my duty to minimize as much interest that I would pay as is humanly possible.
Love your blog! Excellent post today and I plan to share with my young son who is in the process of buying his first home. As oldsters, we always paid extra and just two months ago paid off the house. What a great feeling. 🙂
Congrats on paying off the house!!!! It must be such a good feeling for you both. Now what will you do with the “extra” money every month?
Love your blog! Excellent post today and I plan to share with my young son who is in the process of buying his first home. As oldsters, we always paid extra and just two months ago paid off the house. What a great feeling. 🙂
I have known this for a long time, but hadn’t really seen it in black and white. I have added it to my financial plan. Thanks!
I have known this for a long time, but hadn’t really seen it in black and white. I have added it to my financial plan. Thanks!
Personally, I can’t bare the idea of such a long repayment period.
I would much rather pay more each month but stick with 15 years mortgage. Still, I see how 30 years mortgage may be a good option for some.
This is a very good idea only if we have the ability to pay extra. Especially when the interest rate for ALR loan has increased, borrowers are often felt suffer to pay more. They will face problem with their cash-flow in the long-term.
To get rid of the refinancing fees (legal, valuation, etc), some of the banks can finance or absorbed such fees for you. Try go shopping around and you may discover.
This is a very good idea only if we have the ability to pay extra. Especially when the interest rate for ALR loan has increased, borrowers are often felt suffer to pay more. They will face problem with their cash-flow in the long-term.
To get rid of the refinancing fees (legal, valuation, etc), some of the banks can finance or absorbed such fees for you. Try go shopping around and you may discover.
I’ve been paying $25-$50 extra on the principal each month since our first mortgage payment 2.5 years ago. As you pointed out, even a little bit will help in the long run, especially on a 30-year fixed mortgage. As our income increases over the years, I plan to increase our additional principal payment.
I’ve been paying $25-$50 extra on the principal each month since our first mortgage payment 2.5 years ago. As you pointed out, even a little bit will help in the long run, especially on a 30-year fixed mortgage. As our income increases over the years, I plan to increase our additional principal payment.