Jan 16 2012

Even small amounts have a big impact when prepaying the mortgage

Ever wonder the impact an extra $10, $50, $100, or $500 could have, when paid to the principal on a loan?

You can see by using an amortization calculator or spreadsheet (link goes to the excel sheet I used above. It’s sweet).

We are extremely early in our 30-year mortgage, having completed only three payments. Loans such as mortgages or car loans are structured so that you pay only a little bit of principal and a lot of interest in your earliest payments, and it gradually adjusts so that by the end of the term you are paying a lot toward principal and not as much to interest. As you can see by my screenshot, our first payment sent $495 to interest and only $173 to principal.

The more we can put toward the principal early in the amortization period, the more money we’ll save off the life of the loan.

We can take a concept from 20sMoney and determine our mortgage balance’s tipping point — that is, the point where we are paying more toward principal each month than interest (without extra payments). For us, with no more extra payments that point will come at month 176, or when we have paid down about 33% of our starting balance.

We could be more substantial with our extra payments until we reach that tipping point, and then shift our extra payments to retirement investments, since more principal would be going to interest at that time.

Our starting mortgage balance was $132,000 at 4.5% over a 30-year term.

Say I paid my mortgage balance every month, and then at the end of the first year, I applied one extra $100 payment toward the principal. The calculator shows that $100 at month 12 would save $265 in interest. Now, say I didn’t make any extra payments until year 4. I put $100 toward principal on month 48, saving only $219 in interest.

Say I don’t make extra payments until year 10. Put in $100 extra, save $143 in interest.

We paid our regular balance for our first payment. For the second two, I rounded up the total amount of the check to an even $850 (this amount is including taxes and insurance).

So far, those two tiny extra payments of $3.51 each have saved $17.84 in interest.

Let’s look at what an extra $3.51/month will do if I paid that tiny extra amount for the life of the loan. I’d save $1,375.59 and pay off the balance three months ahead of schedule. That $3.51/month doesn’t seem so inconsequential now, does it?

An extra $10/month toward principal saves me $3,789 and pays it off 10 months ahead of time.

An extra $20/month would save $7,283 and pay it off 20 months faster.

An extra $50/month saves $16,390 and we’d pay it off almost 4 years early.

An extra $100/month saves $28,194 and pays it off 82 months early.

We haven’t decided how much extra we want to start regularly overpaying.

We DO want to make sure we’re funding our retirement accounts really well from here on out (we’re back at 15% gross going to retirement, plus company match), because just like the power of compounding interest works to reduce a loan balance, it also works to increase our investments. We aren’t maxing out both of our IRAs or Shane’s 401(k), so you could make the argument that we’d better get to that point first, and then take care of the mortgage.

Some people argue that when your mortgage interest rate is low, you’d be better to invest that money in our retirement accounts instead of prepaying the mortgage.

Yes, it’s possible that if we put an extra $100 in our IRA per month instead of toward our mortgage, our portfolio could increase at a higher rate than the interest savings. Or, it couldn’t. Hard to predict. My mortgage balance is a predictable amount because it is a fixed rate. And inflation? Yeah I can’t predict what will happen there.

Here’s the thing: I’m not such an all-star with our budget that I can guarantee we are awesome with every dollar, every month. FAR from it. I can’t say that I wouldn’t fritter away $20 or $50 or even more in a given month, if given the opportunity. I guarantee we fritter away more than $3.51/month.

While I am trying to automate our budget, we are people, not robot spenders.

We want to fund our investments as best as we can right now, but I still think there’s room for paying extra on our mortgage. We can have it both ways.

The amount can be small enough that we won’t notice it’s gone, but big enough to have an impact.


How about you? Are you paying extra on the mortgage? If so, are you putting a fixed extra amount, or throwing as much as you can at it? What are your thoughts on this?

14 Responses to “Even small amounts have a big impact when prepaying the mortgage”

  1. We go back and forth. When we refinanced acouple years ago, we decided to stick with a 30 year mortgage instead of a 15 year mortgage for the flexibility. While we could have managed the 15 year payments, we would have been very tight any month that included unexpected expenses, and we just didn’t want to live with that stress. Instead we regularly put $40-$100 extra into the principle each month for the first 1.5 years. We’ve backed off that for the last few months because we needed to quickly focus on our vehicle savings account. Now we’re ready to go back to additional principle payments. Our goal is to pay off the mortgage before our son starts college, so 17 years in total. Thanks for the link, that’ll help make it concrete instead of guessing at our new pay off dates.

  2. You’re welcome! I LOVE that spreadsheet. I used it when we were paying off our car.

    I hope you can tweak the spreadsheet to work for you. It might be a little tricky since you’ve already made prepayments, but perhaps you can load in the remaining balance? I dunno.

    I do think it’s reasonable to stop pre-paying for awhile so you can put money toward other goals.

    We felt the same way about a 15 year and that’s why we chose a 30 — we didn’t want any certain month to be too tight.

    A goal to pay it off before your son starts college is excellent. It gives you a target date in mind, AND it’ll free up that money so you can put toward school.
    Kacie´s last post ..Is Amazon Mom Prime worth it anymore?

  3. You know, I never really thought about how such a small amount extra, could make a big difference like that. I used to pay a tiny bit extra to our mortgage each month, then figured it wasn’t doing much good anyway, so I stopped.

    After reading this, I’ll be sure to start up extra payments again, even if it’s just a few dollars! Like you said, it’s not like you really miss an amount that small anyway.

    Thanks for sharing!
    Mary @ Tips & Treasures´s last post ..What to do with saved cash when you cut expenses?

  4. I am glad to hear that, Mary! Thank you so much for telling me. I’m glad this post could help encourage you. It means a lot to me!
    Kacie´s last post ..How I’m automating our money so I save time and meet our goals

  5. wow! that’s all i could say. I don’t know too many people don’t waste at least $10 a month, seeing you could pay off your loan almost a year early is amazing! just for $10 a month. that’s like renting 2 movies, or eating out once! we don’t have a mortgage, but we do have a personal loan, i am gonna play with that thing and just see if I can amaze myself. lol
    Jes´s last post ..Time for a change

  6. I love this post! And I agree with the above commenters, this logic can easily be applied to other loan situations. I’m going to get with the husband and sit down and talk about where we can stand to throw an extra $10 here and there! Thanks!

  7. I did extra on all 3 of the houses I bought and it paid off when I had to sell earlier than planned!

    I live in awe of my disciplined Grandparents who paid TRIPLE payments on a 15 year mortgage in the late 50s (similar to today’s rates)!!!
    Lisa´s last post ..Review: The Lazy Couponer

  8. Great post! We’re only a few payments in to our mortgage as well – much like you, I’ve only paid a few dollars extra each payment so far, and I wondered if it mattered much. Answer: Just enough to make me consider a little more. :)

  9. I wish we could pay extra each month. We paid about $500 extra this year, but then had to quit to save up for braces for my daughter. I would like to at least make 1 extra payment each year, but that is $1000. If I rounded our payment up to the next hundred each month that would cover it. But we never seem to have the extra for everything we want to save for.

    What if you rounded it up to $900 a month? You would cut 4 years off your mortgage and save $16,000 according to your math. I go back and forth almost weekly as to what goal we should focus on at the any given time. I would love to pay off our mortgage, but even paying extra we are looking at 20+ years probably. Depressing!
    Jennifer´s last post ..Grocery Update 1/15/2012

  10. I love paying extra on our mortgage, it feels so much more fulfilling than if I spent it on something else. I tend to actually feel guilty if I don’t put as much extra in sometimes.
    We are planning to build a home, so currently we only have a mortgage on a block of land. However, we are still paying off as much extra as possible. At the moment we put in around double the actual payment. However, once we have the full loan and the house is built, we will probably only be able to put a few hundred extra in per month between the two of us.
    We don’t have a plan as such as to when we would like to have it paid off (other than as quickly as possible), all I know at the moment is we want to pay as much extra as possible while it’s just the two of us and no babies. The other goal at this stage is to make sure we have a paid off house by the time we retire (and that we have plenty of retirement funds).

    I work as a hospital social worker, I meet people constantly who are past retirement age and still making monthly mortgage payments. It’s terrifying how many I have met!

  11. I love the power of the small extra payment. I recently figured on a 200,000 mortage, if we only paid $10 extra per month, we would knock off 4 months off the end of a 30 year mortgage. That is just from an extra $10 a month. Imagine how much more powerful it is when talking about bigger extra payments.
    Fiscal Phoenix´s last post ..Why It Is Important to Feel the Pain of Getting Out of Debt

  12. I finally got this calculator downloaded on my computer (my husband’s the techie) and used the back info on our mortgage website to culculate what we’ve manage in the last 3 years. By paying about $6,500 in extra principle, we’ve saved almost $20K in intrest and knocked off 2 years! Awesome! Now I’m much more motivated to return to making extra payments.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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