With my mortgage refinance in the works, I figured today would be a good day to share a simple tool for calculating how you can, by paying just a little extra on your monthly mortgage bill, pay it off sooner and save tons of money in the process. I’ve always rounded up our payment to the nearest hundred dollars – for the past few years, that means just $35 a month extra – but while that seems a rather insignificant amount, over the course of a 30-year fixed-rate mortgage that would knock SIX YEARS off the end of my mortgage period. Six years, and some seventy-thousand dollars in interest payments.
Working on my new mortgage terms, I wanted to see how I can pay it off sooner, like in 20 years instead of 30, and so I pulled up a handy-dandy calculator in Excel that lets you play with the numbers. For me to shave ten years (and save over $80k in interest payments) I would have to send in an extra $300 a month – but on my new terms that is still less than what I was paying so it’s very doable, and would save me so much money…
If you want to give it a try, here’s a link to an Excel worksheet that you can customize with your mortgage balance and interest rate, and lets you play around with other info (like the extra payments): Home Mortgage Calculator in Excel
If you are not an Excel fan, you can do this kind of thing online as well; here’s a link to a very simple one: Mortgage Payoff Calculator
When you’re sending more than the minimum amount, do you have to let them know that you want the extra applied to the balance, or do you just start adding it? I’m, admittedly, less educated about this stuff than I should be, but I find it fascinating!
Nope – they will automatically apply it to the principal balance. The interest amount is pre-calculated out on a schedule (amortization schedule), which is determined when you start the loan and is how your monthly payments are established, so that at the end of the term you will have paid off the principal balance (and a hefty amount of interest along the way). It’s an upside down pyramid, so that in the beginning you are paying more interest than principal, but that shifts along the way while your payments remain the same; gradually, your payments will be applied more against the principal and less against interest.
When you send in extra money, they apply it to the scheduled interest first, then the rest to the principal. Over time, you are making a bigger dent in the principal, which trickles down and changes the interest schedule – but they don’t tell you that because it just happens behind the scenes. You’d only “see” it at the very end of your mortgage, when you would get a final payment invoice earlier than what was originally scheduled.
Make sense?