Mortgages & Creative Financing

Are Extra Mortgage Payments Worth It? A Look at the Numbers

Expertise: Personal Development, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management
42 Articles Written

How much time and money can you really save paying a little extra on the mortgage? Well, it depends on how much you spend and when you spend it.

When most people think of loan payments and amortization schedules, they view them as linear. An additional dollar towards the mortgage now is the same as a dollar later. Or the more you pay towards principal every month, the more benefit you receive. Neither of these are true.

How Additional Monthly Payments Affect Your Principal

Let’s look at an example to see how it actually works.

Assumptions:

  • 30 year mortgage
  • $300,000 loan
  • Interest rate 5%
Additional Monthly Payment Time saved Interest Saved

$30

1 year 2 months

$13,458

$60

2 years 4 months

$25,560

$150

5 years 2 months

$55,605

$300

8 years 8 months

$91,742

$500

12 years

$124,385

$1,000

16 years 11 months

$170,620

Data via: www.bankrate.com

The first thing you’ll notice is that paying a little more each month saves you money over the long term. With just $30 in additional principal payments a month, which most of us can afford and wouldn’t notice, you can save over a year of payments and $13,458 in interest. If you upped it to $300 a month, you save $91,742 over the life of the loan. That’s equivalent to a few years’ wage for most people. 

real-net-worth

Related: Compound Interest: Einstein Loved It — And You Should, Too. Here’s Why.

Now, the most important thing to notice about this chart is that for every additional dollar put towards principal, you get less of a return than the previous dollar. It’s called diminishing returns. That’s not what most people would expect because we’re used to getting more when we pay more.

Looking at the $30 and $60 monthly payments, you can see that $60 a month does not give you twice the return of $30 a month. Actually, the first $30 will save you $13,458 in interest, while the second $30 will only give you $12,102. To make matters worse, if you did $500 a month, you would save $124,385, but only $46,235 more if the payment was doubled to $1,000 a month.

The same pattern holds true for the time you save on the loan. The more you pay each month, the less benefit each additional dollar has on time saved.

As Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” 

The Effects of When You Pay & How Much You Pay

We’re not done yet.

Let’s look at when you pay and how much of an impact that has on long term savings and benefit.

Below is a chart showing the impact of paying an additional $100 a month over different 5 year intervals.

$100 a Month Extra Payment Time Saved Total Interest Saved
Years 1-5 1 year 2 months

$17,025

Years 5-10 11 months

$12,290

Years 10-15 8 months

$8,304

Years 15-20 7 months

$5,170

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Years 20-25 5 months $2,708
Years 25-30 4 months $785

Data via: mtgprofessor.com

Each of the payment plans above is exactly the same. However, the outcome is not. For example, if you pay $100 more a month for the first five years of the loan, you will save 1 year 2 months of payments and $17,025 in interest. Not bad. If you did the same payment plan between years 25-30, you would only save 4 months and $785. 

Let’s go a step further (not in the chart) and calculate the extra payments starting in year 10 and going until the loan is paid off (18 years and 1 month of payments). This payment plan would yield a savings of $15,401. Keep in mind that the same payment for the first 5 years saved you $17,025, or $1,625 more than the same $100 a month for the last 18 years. That’s a huge difference. 

Related: I’m Using Ancillary Income to Cover 63% of My Mortgage: Here’s How

“Time has a wonderful way to show us what really matters.” —Margaret Peters

master-lease-option

The Moral of the Story

We tend to think that paying a little bit more won’t make that much of a difference because it usually doesn’t. In the case of paying off a loan, a little matters the most. And the sooner you do it, the better off you’ll be.

Today is a good day to start.

[Editor’s Note: We are republishing this article to help out our newer readers.]

Do you make extra payments on your mortgage every month? Why or why not?

Be sure to leave a comment!

Brett Lee is a licensed Real Estate Broker in Portland Oregon where he helps people achieve a better future so they can do the things that truly make them happy. Brett is also a buy-and-hold invest...
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    Eloisa
    Replied almost 3 years ago
    If you have enough income that you are considering paying down your mortgage, here are some ideas to consider. First, have a 12 month emergency fund in cash or cash equivalents to meet future bumps in the road. Second, pay off all credit card or other high interest debt. Third, if your employer offers a dollar for dollar matching 401K, you should probably invest some of your retirement savings there, It’s hard to beat a 100% return that their matching contributes. Fourth, strike a balance between savings and investments to ensure your are protected, at least in part, should a market correction reduce your investments. Lastly, tax time is a perfect time to conduct your annual financial review. You probably have all your financial data collected. With your taxable income identified, it’s pretty straightforward to establish your annual budget, short and long term goals, identify your assets and debts and determine your net worth. Tax time is the perfect opportunity to review where you are, where you want to be and how you are going to get there. If you are considering paying down your mortgage, it means it’s time for this annual review. Paying down your mortgage is inherently neither good nor bad but it should only be done in accordance with your annual review and be part of a long term strategy.
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied over 2 years ago
    I liked this article, Brett. Thank you for breaking it down and showing what even small additional principal payments grow to. Holy slice and dice little $30 a month ROIs in the comments. One of the reasons I won’t bother writing a blog. Effort to reward ratios arent mentioned. ‘I would rather invest at 5.5% than earn 5% with principal paydown.’ Yeah, but you’re leaving out risk and effort. Can’t do $30 Or $60 extra on auto pay to shorten your payment by years? Here’s something simple. Round your payment up to a round number. If your payment is $927.65, make it an even $1000. I have never paid off a mortgage and looked back wishing I’d kept the extra cashflow I didn’t miss anyway or wished I still had decades of payments remaining. All of you that analyzed the crap out of $30 wasted more effort than it would take to just increase your auto pay to save thousands in the long run. If $30 a month matters that much to you, you have bigger problems than maximizing the ROI of your every little dollar.
    Susan Maneck Investor from Jackson, Mississippi
    Replied over 2 years ago
    In my opinion it really all depends on your interest rate and sometimes how much insurance your lender makes you carry in insurance. Wells Fargo used to make me carry the full replacement value of one of my propertieas both in regular insurance and flood insurance. This in an area where houses could be bought for less than $50 a square foot. I started making extra payments because I wanted to get rid of that mortgage as soon as possible. Eventually Wells Fargo changed their rules and I stopped making the extra payments. The normal rule of thumb for me is to pay off whatever has the highest interest rate first. And if I my investments bring in a higher rate of return than my debts cost me, then I pay as slowly as possible. It is all a matter of doing the math.
    Clint Larson from Minot, ND
    Replied over 2 years ago
    Inflation is what I’m trying to wrap my mind around. It would seem to me that, sure, you’re saving a good amount of money on the life of the loan by paying down the mortgage. In today’s money. I think the savings total could only be considered in the context of when the loan is paid off. With inflation factored, it seems the return you get by paying extra is not good. I’m calculating the $13000 saved with $30 extra paid per month is worth maybe around $6580 by the time the loan is paid off, so that’s only about $19 saved in year 2046 for the $30 you put in today. Negative return on the extra payment over the long term. I’m buying my first house and would like to hammer this out – am I missing something here?
    Bryan Konopacki
    Replied over 2 years ago
    What is the opinion if the mortgage you are trying to pay down is your own? Recently my wife and I decided to put off purchasing our first investment property to focus our energy instead on paying down the mortgage on our first primary residence. When we closed on our primary 2.5 years ago, we put over 50% down and our loan was only for $100K. We currently began paying over $2K/month to secure our home where we live with two kids. After the mortgage payment, we still save approximately $1,500 towards our next down payment once we pay off our loan in 4.3 years. Any opinions on the ROI of that strategy (3.75% on mortgage) vs. utilization of the liquid elsewhere? Were not really seeing anything attractive (safe) with a larger interest rate. Thanks in advance!
    Laura Verderber Rental Property Investor from Fairhope, AL
    Replied about 2 years ago
    You’re so close to paying off your house. Just finish doing it. If something happens, you still have that nice amount of cash to weather any storm. After you invest and don’t have the cash, you will still have a lower cost of living. You are reducing risk this way.