Brandon Nelson
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Paying It Off Early: Does It Pencil?
If you’re buying a home in Bellingham or anywhere else in the near future, and taking out a loan to do it, you’d be wise these days to go for a fixed-rate mortgage. Interest rates are STILL historically low, and there aren’t many — or rather, any — economists out there talking about the rates dropping (significantly) anytime soon. (It’s no secret that the opposite is what’s predicted.)
But even a 30-year-fixed rate of 5% on the avergage-priced Bellingham home ($349,654 over the past 6 months) with 20% down, you’re going to pay $260,859 in interest over the life of that loan.
IF, that is, IF you make the “minimum monthly payments.”
Home loans payments are like credit card payments in that you pay the most if you pay the minimum monthly amount. But if you tack on some extra moola each month, that extra moola goes against the outstanding principal. And little by little, it has a DRAMATIC effect on the aggregate amount off interest you pay and the TIME over which you pay it.
One commmon and easy-to-remember techique is to take one month’s regular (”minimum monthly”) payment, divide it by 12 — the number of months in a year — and tack that on before you send it off to the bank. Here:
- In our example, the principal and interest payment amount on our average Bellingham home is $1501.61/month. (That’s based on a 20% down payment and a 5% interest rate, and does not include tax or insurance).
- Divide that figure by 12, and you get $125 plus a few pennies.
- By tacking that on each month, you cut the full-length term of 30 years and 360 payments, down to 25 years 4 months and 56 fewer payments!
- And you SAVE… hold onto your hat… $47,419 in un-spent interest money. Yes, you KEEP that MONEY!
After the now-known-to-be irrational lending and spending behavior that created the over-inflated market of yesterday, buyers nowadays are prudently spending as little as 50% of their qualified limit when they shop for a house. I recently had clients who were approved up to $380K opt to buy a house in the mid-$200K’s.
So… HELLO… it’s probably not that much of a stretch for people like them — and maybe YOU — to tack on some extra $$$ each month to that “minimum monthly payment.” Do it! That tens of thousands of dollars you save will be your own!
Yes, it pencils! See for yourself. Here’s a great mortgage prepayment calculator to see what different amounts of extra payments will save you in time and money.
Numbers are always fun … thanks Brandon