Most people find themselves swimming in debt after spending too much on the holidays. Next year, you should do something to make that debt seem a little less insurmountable: make an extra mortgage payment so that you’ll own your house much quicker. Sounds hard? It’s not really all that hard at all if you do it right.
Why should I do this? Simply put, the home mortgage is for many people the biggest debt they will ever incur, and they’ll spend much of their adult lives whittling down that mortgage. The sheer relief of owning a home is incredible, and a single extra payment now can knock several months off of the mortgage at the end. An annual pledge of an extra payment can knock several years off of the end of the mortgage. The best part? If you do it right, you’ll barely notice the extra payment.
Let’s say you bought a house for $150,000 at the end of 2005, and your payments began on January 1, 2006. Since you got a 6% interest rate, the monthly payments are $989.26. Every month from now until January 1, 2036, you’ll be paying $989.26, like clockwork. 2036 seems a long ways off, but try to imagine yourself in 2036. You’ll be twenty nine years older. Will you have grandchildren? Will you be retired, or thinking about it? Wouldn’t it be nice to have the house paid off a little bit earlier, especially with just a little effort now.
How can I do this? There are two simple plans for adding an extra mortgage payment each year.
Add 1/12th of a mortgage payment to my monthly payment. This is my preferred plan because it’s relatively low-impact each month and you can make it nearly automatic. In the above example, your monthly mortgage payment is $989.26. 1/12th of that is $82.44. So, if you paid $1071.70 each month instead of $989.26, you would be effectively making an extra payment next year on your mortgage. Sticking to this plan would move the payoff date from January 1, 2036 to October 1, 2029, a difference of six years and three months.
Make a single additional payment at the end of the year. Basically, you just send in your December payment with a double amount, $1978.52. If you stuck to this plan, you would move the payoff date on your home from January 1, 2036 to October 1, 2030, a difference of five years and three months.
What if I only do this once? If you only do this one year and make a single extra monthly payment next December and never bother with it again, you’ll move your payoff date from January 1, 2036 to August 1, 2035. By paying one payment now, you don’t have to make five payments down the road.
What if I can do more? After the first year of his mortgage, my uncle paid 20% extra each month on his mortgage. Let’s assume my uncle started his mortgage on January 1, 2006, and he had a $150,000 mortgage, just like our example. That means each month he paid his $989.26, plus he added in an extra 20%, making it $1187.12. When would he pay off the mortgage with that 20% extra each month, a mere $197.86, or in other words, $6.60 a day? If he sticks with it, he’ll pay it off of December 1, 2025. He’ll pay off his house ten years and one month early.
So give yourself a great Christmas present next year: an extra mortgage payment. You might not see it as a gift now, but your future self will thank you a thousand times.