In the past year, many people have refinanced their mortgages to take advantage of historically low rates, saving themselves thousands in interest. If you’re one of the lucky people to have a low interest rate, you’ve probably figured this will be the last home loan you’ll ever need for your current residence.
With the cost of borrowing money so low, it may seem that prepaying your mortgage doesn’t make much sense. But the truth is, no matter how low your rate, you can save on interest if you can manage to squeeze in an extra payment at least once a year.
Take the following example with a 30-year fixed loan on $100,000, with a rate even as low as 4%:
In this scenario, your loan would also be paid 48 months faster! So your 30-year tem would really be 26 years.
Of course the savings are less the shorter the term and the lower the interest, but still worth looking into. For instance, check out the savings when you make one extra payment each year on a 15-year loan for $100,000 at 3.75% interest:
In this case, you’d also shave 18 months off your term, turning your 15-year loan into a 13-and-a-half-year loan. Not as dramatic as the savings on the 30-year, but you still come out ahead.
Naturally, if you have debt – such as student loans, credit card debt or a car loan – at a higher interest, it makes the most sense to put extra money toward those debts before you start paying extra toward your lower rate mortgage.
You can find out exactly how much you’ll save on your own loan by checking out an amortization calculator and putting in your numbers. It’s a question that comes up again and again: How much will I save if I pay off my loan early? Looking at the graphs above, it’s clear that the higher your interest rate and longer your term, the more you’ll benefit from extra payments.
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