Summer is in full swing, so I intend on keeping today’s article short and sweet! In this 5 minute read, you can learn how to pay off your mortgage twice as fast (and save yourself thousands upon thousands of dollars in interest costs by doing so). Do I have your attention yet?
I got into a conversation with a friend about her house. She recently purchased her first home, and was feeling like she was going to be paying for it forever.
I casually suggested she pay off her mortgage twice as fast to save interest. I was caught off guard when she burst out laughing at my suggestion. She said if she had enough money available to pay double her mortgage monthly, she would have no stress in the first place.
However, you DON’T have to double your mortgage payment to pay your house off twice as fast!
Huh? How does that work?
Simple: Your monthly mortgage payment is a combination of the principal (what actually goes on your balance) and interest.
How to pay off your mortgage twice as fast:
Let’s do some simple math.
Imagine you buy a house for $100,000 (yeah, I wish that price was available in my area!). You agree to a 30 year mortgage at 5% interest.
Your monthly payment would be $533.69 (Gov of Canada Mortgage Calculator). However, that includes both interest and the amount actually applied to your original balance.
This is where things get interesting (and painful)…
When you buy a house, you are given what is called an amortization schedule. It breaks down your monthly payments into interest and principal so that you can see where your money is being applied.
As you can see, in your first month (like all months) the payment that leaves your account is $533.69. However, only $121.30 of that is actually applied to your principal! The rest goes straight to interest. So how much remains on your mortgage after the first payment? $99,878.70. Yep, it barely changed.
In fact, in your first 5 years of paying for your mortgage you will pay a total of $32,021.40 ($533.69 monthly x 60 months). BUT only $8238.29 will have gone to the principal balance.
Ouch. 74% of the money you have paid towards your house went to interest.
Your remaining balance after 5 years? $91,761.71. If you stick to your payment schedule for the 30 years you will have paid a total of $192,128.64 by the time you’re done ($100,000 for your house and $92,128.64 in interest).
So what is the good news?
In order to pay off your mortgage twice as fast, you do NOT need to double your mortgage payment each month. In fact, not even close.
You only need to double the principal portion of each month!
So using my sample amortization schedule above, in month one you need to pay $654.99 to pay your mortgage off twice as fast (Original $533.69 payment plus $121.30 additional principal payment). Yep, $121.30 shaves an entire month off your mortgage.
In month two, you would need to pay an additional $121.80.
If you always double the principal portion of each month, you can be mortgage free in 15 rather than 30 years. As a tremendous bonus, you’ll save an incredible amount of money in interest!
I’ve mentioned numerous times that small sums of money used correctly can make massive differences in your long term financial health.
If you’re a home owner, look at your amortization schedule. Figure out how much extra it would cost monthly and whether that is something you’re capable of.
You could be waking up in a paid off house much earlier than you expected!
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