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.