If you are making monthly payments on a 30-year mortgage
, you are probably familiar with the huge bite interest takes out of your payment.
Maybe you have seen the annual statements that your lender generates which show how much interest you paid during the year. Maybe you were shocked that 70-80% of your payments went to pay the bank interest, not to reduce what you owe the bank for the principal.
Perhaps you didn't know that with 30-year mortgages it can take 18-20 years before even half of your monthly mortgage payment goes to reduce the principal debt.
Here is an idea that can save you tens of thousands of dollars and result in a return on your money of over 7% annually -- pay an extra $100 each month on your mortgage payment.
Believe it or not, coming up with an extra $100 every month ($1,200/year) can give you a big return. Here is an example to show you how that is possible.
Let's use a $200,000 mortgage at 6.5% as an example. When you borrow $200,000 at 6.5% with a 30-year mortgage, your monthly payment will be $1,264. If you don't make any extra payments, after 30 years you will have paid $255,089 in interest charges.
By paying an extra $100 every month, that 30-year obligation gets paid off in 24.4 years. The $100 extra payment each month allows the 360-month obligation in this example to get paid off in 293 months. You end up paying $199,141 in interest charges instead of $255,089. That is a savings of $55,948.
For 293 months you came up with an extra $100. If you look at that extra $100 as an investment, you will have invested $29,300 by the time the loan is paid off ($100 x 293 months).
Your return on that $29,300 investment was a $55,948 savings in the interest you would pay the bank. Wow. A $55,948 return on a $29,300 investment. That is a whopping 190% return. It took you 24.4 years to achieve that 190% return. That works out to about a 7.7% annual return.
Considering that early in 2009 most savings accounts and money markets were paying less than a 4% annual return on your money, 7.7% is a great return, nearly double what that money could earn in the bank. Sometimes the best return on your money is through paying down debt so you pay less interest.
