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.

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## 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 |

From: 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.

**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 |

Years 20-25 | 5 months | $2,708 |

Years 25-30 | 4 months | $785 |

Data from: 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

## 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.

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

**Be sure to leave a comment!**

## 35 Comments

I thought since the extra money you pay early only comes off the back end, if you are a saver, its better to just save the money into the saved balance equals the mortgage balance, then send it all in.

Seems it would be safer and not cost you any more money to save your cash up then pay off your mortgage. Then you stay liquid in case of some unplanned disaster in which you need that money.

I have a 5% interest baring account. My mort interest is 4.25%. I am better served putting it into my interest baring account where I actually make money and have liquidity. It it compounded annually, so that is a bonus. My plan is to pay it all off at once. In fact I just took a HELOC to take money out and place it where I earn more interest than I pay.

If you are getting 5% interest in a savings account, you are paying taxes at years end. Depending on your income tax rate, you actually might be loosing money with that strategy.

No, im wrong. Just played around with a mortgage amort calculator. Doing it the way i suggested you save less than half and must have alot more at the same payment #.

Keep in mind a $1000/month today will buy much more than $1000/ month in 30 years because of inflation. Your fixed payments will become more affordable over time.

intersting read I am about to get my first mortgage and will consider extra payments. Is there a calculator you use or and spreadsheet for running the extra payments

One thing to note: If you look at an amortization chart, you’ll see the payment split between interest and principal. In the beginning it’s mostly interest, and incrementally switches over to mostly principal. Looking ath payment #1, for example, let’s say it’s 30 principal and 500 interest on a 530 payment. That 500 is what you’ll pay in interest on the 30 of principal over 29 years and 11 months. This is why it’s so magical if you start early. Let’s say the next one is 31 p / 499 interest. If you pay that 31 extra along with the 1st payment, you’ve just saved 499. That one payment of 30 kills the last $530 mortgage payment and lets you burn your mortgage one month early.

That is not correct. The interest number on the amortization chart is the interest you paid on the balance of the loan for that month, not the amount of principal you paid down. For a simplified example, if you have a 100,000 balance on a 5% mortgage, your interest for one month is about $417. If you pay a $450 mortgage bill, you paid the $417 in interest on $100,000, plus $33 in principal. So next month you will pay interest on $99967, which will be slightly lower than the previous month, which is how the payment stays the same but the balance and principal/interest ratio changes.

If you played your numbers out, you’d be saving about $6,000 a year by paying an extra $30 a month, which would get you to the $13,000 lifetime savings in just over two years.

I’m not saying don’t pay it down early; everything Brett says above holds true, and depending on the rate and terms of your mortgage, if can make a lot of sense to pay it down early. Just don’t expect the magical result of Kenneth’s example.

Kevin you are correct but Kenneth has the right idea. Paying early in the mortgagee cycle will save more interest than paying later. That said I do not think you should be paying down the mortgage when you are starting to invests. You need to grow your base of wealth b purchasing cash flowing properties that also have a shot at appreciation. Appreciation will make you wealthy but cash flow will put bread on the table. Let your residents pay down your mortgage and you save your money to purchase additional properties. As soon as you have the number of properties you need to meet your goals of passive income then stop buying and now concentrate on paying down the mortgages. After 20 years you will have a payment of $500 but your balance may have dropped to such a low level that freeing up that $500 makes eminent sense.

Edward, I agree. While looking to grow a portfolio, a dollar is much more valuable in the bank preparing to become part of the next down payment than going toward loan paydown. It really depends on the individual investor’s goals, and the terms of the loans. Right now, I am in my early 30s, interested in growing my portfolio, and have fixed sub 5% rates on all my loans. If I were 15 years older, interest rates were up around 8%, or I were no longer looking to grow my portfolio, paying the loans down could make sense.

If you plan to retire and live off your rental income, then paying the loan down early is about as close to literally buying time as you can get. Once you have a portfolio that brings in enough income to live off of if there were no mortgage, then the sooner you pay down that mortgage, the sooner you can do that. You can get higher ROI by putting that money toward a down-payment on another property, but that might not be right for everyone’s goals.

Last month and this month I’ve paid 2000 EUR extra. I think that, even with the low interest rates and government subsidy in the Netherlands, making extra payments is wise.

Not only do I make extra payments to pay down my mortgage, I also invest in the stockmarket. Why? Because of diversification.

The only reason I’d like to save money into a savingsaccount is to get enough for a downpayment on a rental property.

I’d also want to link to an article from Mr Money Mustache. He explains what type of investment is wise:

http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

Sorry, I just looked that up and sure enough it’s true. (The interest payment is calculated by multiplying 1/12 of the interest rate times the loan balance in the previous month.)

I don’t believe in early payoff on rental properties if possible. I will continue to let me tenants pay off the mortgage one month at a time. On a personal residence there might be some value in an early payoff. Mortgage interest deductions for your homestead are almost worthless.

What about the opportunity cost of putting the money toward the mortgage vs. re-investing. E.g. if a loan costs 4% & you can get 7% on rentals why not use the cash to acquire more properties?

Bingo! Finally some common sense in the never ending discussion of paying “extra” mortgage. As you stated, it all comes down to opportunity cost and how much return you can get from that “extra” invested somewhere else. Nowdays, when mortgage interest rates are on historical lows, the last thing I need to do is to make “extra” payments toward my mortgage.

There may be a good reason not to, as I’ve mentioned in other comments here. Paying your loan off means more cash flow without having to buy or manage another property. If you’re in real estate for cash flow over growth, or are planning for a time in your life when you will be, then early or extra loan payments can make sense for you. Like any other investment vehicle, real estate can be used in different ways by different people depending on their individual goals, risk tolerance, and time of life.

Excellent discussion. I have been paying extra principle on one of my properties (the first I ever bought and lived in for several years) but am now re-evaluating. I’m in my mid-30’s and very much growth-oriented so this has given me reason to think. I have a fixed mortgage at 4.5 and am confident I could outperform elsewhere.

For you folks commentiing, i’m sure age doesn’t come in to play, but with real estate we often value cash flow vs. ROE. Hence, you can look at pre paying mortgages in another way…

One more thought … (I posted completely erroneous info with my first post, so I’ve got to redeem myself or go down in flames trying here!! haha!)

Instead of comparing returns “apples to apples” what will your return (cash flow %) be during the remaining term of the mortgage if you pay it off?

For example, I have a SFH with 38k balance and 14 years remaining. If I pay that 38k off today, I get $3,779 a year extra for 14 years which is a 9.9% return for those 14 years. 14 years and 1 day that scenario ends. But you get the picture. If you’re 60 years old, this is sort of (but not 100%) like putting your money in an Annuity. You can do a similar but slightly more complex analysis with incremental pre-payment (i.e putting $100 per month extra). Sure the 4.5% you’re saving might pale compared to putting that money in lending club, another building, or a stock mutual fund, but once the mortgage is gone, your return equals the amount of the PI payment for the remaining term of the original amortization period.

I agree with you this time! There is definitely a solid strategic use of paying extra or paying early. It’s not going to give you better ROI than spreading your money around to multiple properties, but it can generate more cash flow from the properties you already own, or get you closer to getting that cash flow. If you’re investing to build wealth or grow your portfolio, get the longest amortization and lowest payment you can, and put nothing in it. But, just like your stock/bond portfolio changes as you near retirement, your strategy on paying loans off can, too.

I never really understood that argument. If you have extra money to pay down your mortgage, why not just keep that money instead and invest it. You are locking yourself into a 4-5% return at best. There are so many better investments out there.

What I think people often miss is that few things in the world are black and white. There is no reason that you have to either accelerate debt payment or build your portfolio. It is very easy to have a blended strategy to do both.

Brett actually did a fabulous job of laying out the rational for that here.

He did a good job showing the diminishing returns where each subsequent dollar you throw at it you will not get as much out of it as the previous one. Hence you can get good results with little payments.

He also did a great job showing the value of starting early. So the “maybe in 15 years after I am done with my growth phase” rational cuts any benefit you get in half easily.

Using the numbers in the article that is a $1,610.46 payment

Let’s do something totally innocuous and make a $5/month over payment.

I hope we can all agree that $60/year should not materially effect your portfolio building abilities.

So if you do that you will shave 2 months off the loan and save $2,346.91 in interest.

As has been briefly mentioned in some comments once the loan is paid off your cash flow goes up. In this case you get 2 months of the extra $1,610.46 as well as $910.98 the previous month as you won’t owe a full payment on that last one. So that is $4,131.90 that goes right into your pocket those 3 months that would not otherwise.

To do this only pay $1,785 over the course of 27 years and 9 months. (Barely more than one month of that extra cashflow)

Also since it is all equity you get the somewhat difficult benefit of having a higher equity stake in the place so if you did sell, or refi, or take out a LOC you will pocket more money/get a bigger line while you do it.

This is with a trivial amount, most people should be able to do 10x this without it really changing any of their strategies (on a single property, if you are doing $50/month of 10 mortgages that will add up to real money).

Anyway point being you can do little things to make big long term impacts without messing up plans for an aggressive growth phase.

If your interest on the loan is 5% and you can earn 5.5% on your money by investing it in something else is 0.5% gain on the extra money that you have. It doesn’t meter if it is $5 or $1000 extra a month.

This is the flaw in all these arguments.

WHAT can you invest $5 in that will make any money?

If you are putting it away to save up to get something that will pay better it isn’t doing anything for you in the interim.

Let’s say you are buying rentals with conventional financing (If you aren’t then all this mortgage stuff doesn’t mean anything to you anyway) and your area isn’t stupid cheap but fairly inexpensive and you can get places at about $100K. You will need to save $20K for a down payment.

Since we are talking about having a mortgage that can be paid down we will say you already have a rental that after all your expenses (Including reasonable factors for vacancy and CapEx, since you are in it for the long haul) you have $100 of cashflow you will put right into your investment account to grow for the next down payment.

You also have a JOB that you will continue to work to pay the bills, have extra money to put towards investing and of course to actually be able to qualify for these loans. From that you feel you can also put another $200/month into that account after all expenses and any other saving/investing you might do.

So now you have $300/month going into that account which means it will take you just over 5.5 years to be able to go out and get another place.

Same scenario but you decide to put an extra $5/month on your mortgage and put away $295/month for the next down payment. Now it will take you… just over 5.5 years to save for the next one… You will need roughly 1 extra month to get there.

So assuming perfect efficiency (You get a property under contact the day you have $20K saved and close a bank loan in 30 days [hahaha…]) the worst argument you can make is delaying a purchase by 1 month.

In reality it will likely take at least a few weeks to get an accepted offer and then 45-60 days to close on it so if you are willing to risk going out and looking while you are still $200-300 light on the down payment you probably have no difference at all.

Both scenarios you will own the same 5 houses at the end of 30 years and be a couple years into saving for the next one.

The difference is in the $300/month one you got each of the next 4 houses 1 month faster, if you have perfect efficiency. You also I suppose would have the currently negligible interest you might get in your bank account on the extra $5/month.

In the $295/month plan you will have saved $2,346.91 in interest and would have increased your cash flow from the first property by $4,131.90 over the last 3 months. Which BTW if you put in the investment account you are much closer to buying property #6 then you are in the first plan now.

Obviously a TON can change over the course of 30 years however the ONLY thing anyone can point out in any of these scenarios that is GUARANTEED is the effect of the extra payment. It is also pretty hard to argue that $5/month or $60/year or $1,800 over 30 years will materially effect anything in your life or investment career.

Why is someone putting all of their money in a savings account in this scenario? Of course a mortgage will beat a savings account. How about we use something logical like the stock market, Roth IRA or 401K.

The $5 that you put down on your mortgage exactly 5 years ago saved (assuming 5% interest here) you $1.41 in interest as of today. I put my $5 in my Roth IRA and, using exact numbers from my portfolio, I turned that into $8.43. So I made $3.43 vs your $1.41 on the same $5 investment. So I made 243% better ROI than. If we turned this into a discussion of the entire life of the loan like 30 years or if you use larger investments than $5 then those numbers will grow much bigger making your argument even worse.

I can guarantee that you paying down your mortgage early will always be a loser versus any number of other investment options.

Great article, I love articles that do a thorough numerical break down. Also lots of great discussion here. A few commenters brought up the fact that this doesn’t consider opportunity cost. If you’re not sure whether or not mortage paydown is right for you, considering your current investment purchase strategy can help shed some light on what is right for you:

1. What is your risk tolerance? The higher your risk tolerance the less mortage paydown fits your strategy.

2. If you could, would you lever up and purchase every future property for 0% down? If yes, paydown is probably not for you.

3. If someone offered you a 60-year amortized loan, would you take it? If so, paydown is probably not for you.

4. Do you plan to sell or 1031 your property before paying off the loan? This one can vary by situation, but if so, paydown makes less sense here.

Brendan,

I would ask, what logical person wouldn’t take a 60 year loan and/or 0% down. I have yet to come across an investment opportunity where putting more of my own cash down or taking a shorter term loan made any sense.

You are ignoring the time value of money and opportunity cost. With interest rates so low the only logical thing is to put every available dollar you have into investments. Whether that is more real estate or something else, it doesn’t matter.

Nice article and the comments below are all relevant points.

At the end of the day, it depends on where you are in life (your age), your ability to get a higher return somewhere else (opportunity cost) and your investment strategy.

For me, I am 46. I am about to close on my 10th and final investment property (for now!). I also actively invest in the stock market.

Age: I want to pay off my homes in 12-15 years so I can retire on the cash flow on the homes by the time I am 60.

Investments: the stock market is bizarro right now, going sideways and not up. Can I really earn better than my mortgage rates of 4-4.5% in the market? RIght now I am not. And whoever is getting a 5% interest rate in savings account (As mentioned at the top of these comments) please let me know! I don’t plan on buying more investment properties (for now, or until the next real estate crash).

So my goal will be to pay down the mortgages. But the key here is that I am not going to pay off one mortgage, and then move on to the next one. I’ll aggressively start throwing extra payments onto all the mortgages as soon as I can to get me quickly down the amortization schedule. As the article did a great job pointing out, you pay MUCH more interest than principal at the beginning of your amortization schedule at the end. So it makes sense instead of paying off one mortgage and then moving onto the next one, to instead throw money at all the mortgages simultaneously.

How does this information apply to bi-weekly mortgage payments? I’m set-up to pay 1/2 of my monthly mortgage ever 2 weeks so I effectively make 13 payments per year. Does this make more or less sense than just paying an extra ~150/mo?

Excellent Article. I wish you would have mentioned the 15 year loan. With a lower interest rate, the payment isn’t much higher than a 30-year loan. No added payments or number crunching needed. 30 year mortgages are rip off for new/young home owners.

Darrell,

15 year mortgage payments tend to be about 50% more than a 30 year loan. It is a personal preference, but I prefer spreading out the loan, the difference in cash flow of $100 vs $350 is huge. Once I have a decent reserve set aside, I can refinance or pay down more. I think for a new investor starting out, a 15 year mortgage is more risky.

Darrell,

I share the opinion of Melroy. Interest rates are at historical lows. So the difference in interest rate of a 30 vs 15 year loan in minimal. And I am risk averse when it comes to mortgages. So if I or my wife temporarily lose our job we are still comfortably able to make payments versus a 15 year loan. So my investment properties are all 30 yr … and then as we make additional money/bonuses, etc we immediately set out to throw some of that extra money into paying the mortgates down (in the early years of the mortgage where it can make a difference…as the article above so aptly points out). Right now, with the stock market being the way it is I am happy to throw any savings at the mortgages for the time being.

Leveraging comes into play here also. If you’re paying extra every month, you get the benefits of interest savings, early payoff, PLUS increasing your equity in the property. Those extra payments go directly towards principal, so you can take a LOC on the first property and use it to purchase another. Pay your mortgage off sooner and still have the $ available to invest. I think it’s a win/win.

Larry –You can always take out a 30 year mortgage but treat it as if it is a 15 year mortgage (ie make the higher payments). If you lose your job, scale back on the mortgage payments until you are stable again — Best of both worlds.

Great article, but just like most people here, I think that there are a number of additional factors that should be considered before you pursue a strategy that includes paying down your mortgage early. The opportunity cost of not investing that money somewhere else (historically stocks pay about 7% annually, and real estate investments seem to pay above 10% for most investors here), inflation (average of about 2%, which adds up over 30 years), and the fact that you’re reducing the time on a loan that is at a historically low rate. The most important factor, and one that I didn’t see mentioned in the comments, however, is that our wise old Uncle Sam has decided that we should be able to write off our interest payments. I won’t go into the numbers here because they are way too variable, but if you figure that about a third of your interest gets deducted, that majorly changes the calculations. In my opinion, unless you have a huge aversion to debt, paying down your loan early rather than reinvesting your money should be avoided at all costs.