Frugal Tip: Make an extra house payment

This is one of those tips that will save you tons of money later by spending more now. I know, that sounds kind of opposite to what we’re trying to do with our “per year savings” that we’ve been adding up, but hang in there with me. This one will blow your socks off!

Assumptions

Like with most of my tips, I have to make some assumptions.

For the purpose of this tip I’ll assume that you own a home.

Further, I’m going to assume you have paid about 5 years on your mortgage and that you have a 30-year loan at 6.00% fixed for $200,000. Fair enough?

Term of the loan: 30 Years | Loan amount: $200,000.00 | Interest rate: 6.000%
Starting date of the loan: June, 2004
Monthly mortgage payments: $1,199.10

Easy Tip

Make an extra house payment every year. I do this by paying half of my mortgage payment every time I get paid (every two weeks). By the end of the year I’ll have made an extra full house payment. Depending on your loan, this may or may not help even more by reducing your principle. To keep from getting terribly confused we’ll assume that we’re simply making an extra payment each year.

So, assuming you start your extra payment this year (5 years in to your 30-year mortgage), your last payment will be in June, 2033. Sounds like a long time, right? Sure, but it’s 4 YEARS early! That’s 4 years saved!

Savings

• Total interest paid over the life of the loan (no pre-payment): $231,676.37
• Total interest paid over the life of the loan (with pre-payment): $198,719.16

That means you will have saved $32,957.22 in interest, just by making an extra payment per year.

But that’s not the impressive number. You just saved 48 payments of $1,199.10!

Add that all up and this simple tip just saved you a total of $57,556.80!

Divide that by the 25 years you were applying the tip (which you thought was COSTING you an EXTRA $1,199.10/year) and you get $2,302.27/year savings.

Tune in for our next Frugal Tip! You can thank me later™.