Paying Just $90 More a Month on Your Mortgage Payment Could Save You Thousands

published Nov 29, 2019
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Do you want to pay your mortgage off quicker and save thousands of dollars in interest over the life of your loan? Okay—that sounded a little bit like an infomercial, but really, if you want to pay your mortgage off ahead of schedule, and therefore cut down on the interest you pay, there’s a simple trick to help you do just that: Pay a little more on your mortgage each month. You can do this by rounding up to the nearest hundred with every monthly payment.

When you employ this strategy, you’re paying down the loan faster, and paying less interest, explains Kevin Leibowitz, a mortgage broker and owner of Grayton Mortgage in Brooklyn, New York. 

Here’s an example: 

Let’s say you take out a $300,000 30-year, fixed-rate mortgage at 5 percent interest. Your monthly mortgage payment is $1,610.46, and that doesn’t include things like taxes, insurance, or Private Mortgage Insurance. If you make that payment for 30 years, you’ll make 360 payments, totaling $531,451.80.

But, if you were to round up to $1,700 every month instead of $1,610.46—paying an extra $89.54 a month—you’ll save more than $36,500 in interest. You’ll cut the length of your mortgage by 40 months, or three years and four months.

This strategy has a bigger impact on smaller mortgages, Leibowitz explains.

For example, he gives this scenario: If you’ve got a $188,000 30-year, fixed-rate mortgage with a 4 percent interest rate and you round up from $900 a month to $1,000, you’ll chop off 62 months of payments, saving $26,522. But, if you have a $607,000 30-year, fixed-rate mortgage at 4 percent and you’re rounding up from $2,900 to $3,000, you’re only cutting off 22 months of payments, but are saving $30,967.

Want to see how much you could save on your own mortgage by rounding up each month? Try out this this calculator and you can layer in information about your interest rate and monthly mortgage payments.

Mortgages are amortized loans, meaning the borrower is paying more interested in the beginning payments compared to the end when more is going towards principal.

“In essence, if you can pay more to principal in the beginning of a mortgage term, you will have less interest paid over the life of the loan,” says Jordan Benold, a Certified Financial Planner based in Texas.

Rounding up on your mortgage and paying more to principal is a good strategy, but only if you can afford to do so, Benold says.

The main drawback of rounding up on your mortgage is that the extra money isn’t available should you need cash in the case of an emergency, like a home repair or job loss, says Benold.

“You should only do it once you have six months expenses saved up and have no other high interest debt—like student loans, car loans, credit card bills, and medical bills—to pay off first,” he says.

Making the extra payments could be a good strategy for borrowers who are paying monthly mortgage insurance, explains Robert Tait, Mortgage Loan Officer with Motto Mortgage Elite Services in Pennsylvania. Most loans allow for Private Mortgage Insurance to be cancelled once there’s 20 percent equity in the home.

In this instance, Tait recommends paying additional principal to accelerate the equity build up so that you can stop paying mortgage insurance as quickly as possible. But, again, be judicious and only do this if you have a good cash flow situation.

Also, it’s important that you instruct your lender on how to apply the extra payment, finance experts say. 

You can send in a separate payment each month with the line “payment to principal only” on the check, Benold says. Or you can add it to your current payment with a line such as “excess over my payment to go to the principal.” If you make your payments online, lenders typically have an option for you to apply the extra payment toward principal. If the earmarking process isn’t clear, ask your lender for instructions.

Here are more expert-approved hacks that can save you thousands on your mortgage.