You won’t save money in the short run, but in the long run, you’ll save thousands merely by making additional payments to principal as you make your monthly mortgage payment.
Especially in the early years of a mortgage loan, the bulk of each payment goes to interest. You may have a principal balance of $250,000 and be making a payment of $1,500 per month with only about $250 going toward the principal balance on your loan. When you make an addition of $250 to that monthly payment in the early days of your loan, you are essentially making two payments.
In the example above, if you voluntarily pay $1,750 per month rather than $1,500, you’ll shorten the life of your loan by about 9 years. Yes, you’ll be paying more each month, but the savings will make it worth the sacrifice, if you can afford to pull an extra $250 from your budget each month.
In this scenario, you would shift from paying $540,000 over 30 years to paying $441,000 over 21 years. A savings of $99,000!
Even if you can’t manage to add a set amount to your regular payment each month, pay what extra you can afford. If you happen to get a windfall of an extra few hundred or a thousand, add it to your monthly payment. For every $1,000 of debt you repay at 6% interest, you’ll pay $5 per month less in interest – for the life of the loan. If you have 300 payments left, that’s not only $1,000 off your principal balance – it’s $1,500 less interest out of your pocket.
Paying a little extra here and there might not show you such the dramatic savings you get by paying a set amount extra each month, but since monthly interest is calculated on the principal balance, the more you pay, the more of your regular monthly payment goes toward paying down the loan, and the sooner your loan can be paid off.
Go on line and play with a mortgage calculator to see the savings you can realize in the future by pulling a few extra dollars out of your budget today.
You can apply the same logic to your credit card debt. You know how your monthly minimum each is reduced each month as you pay down debt? The simple act of continuing to make today’s minimum payment even as the required amount gets smaller will help you pay that debt in record time.
We all have small “leaks” in our budget – yours could buying that cup of espresso on the morning drive instead of taking it from home, or purchasing paperback novels that you could instead get from the library. If you are determined to get out from under debt faster, forgo those small indulgences and use the money to add small increments to your monthly obligations.
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