A Rule Of Thumb Estimate For Extra Mortgage Payments

A Rule Of Thumb Estimate For Extra Mortgage Payments

There are thousands of articles available which discuss the pros and cons of paying extra on your mortgage.  Some argue that it’s a great idea, some argue against it, and others discuss various elements regarding the practice.

One thing I haven’t seen is a way to easily show the impact on the end result, specifically, how will paying extra on your mortgage change things for you down the line.

mb-checkbook201308For the sake of argument, let’s say your mortgage payment is $1,000 per month.  That alone is a good start, but for the rule of thumb, you’ll also need to know what your principle payment was for your most recent payment.

With these two pieces of information, you’ll be able to easily estimate what the impact is of paying extra, whether it be a little extra or a whole lot of extra.

Here’s how.

Say your most recent payment of $1,000 had you paying off $400 toward your principle, with the rest going toward interest.   The $400 is the key part here, which leads to the easy rule of thumb:

For estimating the impact of an extra payment, all you need to know is that paying roughly the most recent amount toward principle will shave one month off the end of your mortgage.

This means that if you apply an extra $400, you’ll shave a month off the end of your mortgage.  Because, what you’re doing is making the next payment, and since all of your extra payment goes toward principle, all you have to worry about to knock a month off is roughly what you’d be paying on your next payment, which is still going to be around $400.

It works for fractions, too.

Say you want to pay extra, but you only have $100 per month that you want to apply.  No problem. With the rule of thumb, you still need roughly $400 to make an ‘extra’ payment, so you’ll just need four ‘extra’ payments of $100 to knock a month off.  Over a twelve month period, you’d knock roughly three payments off the end of your mortgage.

Pretty cool stuff, huh?

There are some catches

As the title suggests, the tip is merely a rule of thumb.  There are a few things that will change.

First, is that this estimate is only good for a short period of time.  See, as your pay your mortgage, whether it be just regular payments or with extra payments, every month you’ll end up paying more toward principle.  This means that as time goes on, you’ll need more ‘extra’ to shave off that month.

In the example above, you’ll find that you hit a point where your principle payment is $450 per month, in which case it’ll take four and a half months to shave a month off.  When you get to where you apply $500 a month toward principle, it’ll take five extra $100 payments, not four.

Think of what that means

The big takeaway here is that you’ll get the biggest benefit from extra payments at the beginning of your mortgage.  The $100 you can apply in the first year will shave more payments off the end than it will if you start in year five or year ten.

But, if you want to hit a specific target of when you want to pay off your mortgage, all you have to do is adjust your payments on a regular basis, re-caclulating the rule of thumb.  So, say you want to make three extra payments a year for the life of your mortgage.  All you have to do is re-calculate the rule of thumb and adjust your ‘extra’ payment accordingly.

Again, it likely won’t be exact, but the rule of thumb is so easy that it’ll give you a really good idea of what the impact is of an extra payment.  I honestly think many people don’t make extra payments because they don’t truly see how it fits into the bigger picture.  This is a pretty quick and easy way, don’t you think?

Readers, do you make extra payments on your mortgage?  If so, do you do it with a specific goal in mind or just as you have the available funds?

19 thoughts on “A Rule Of Thumb Estimate For Extra Mortgage Payments”

  1. We usually do make extra mortgage payments, but we haven’t in a few months because my husband made a career change. As soon as he starts making money again, we’ll start making additional payments. Our mortgage is our only debt left so I want to get rid of it as soon as possible.

    • We had a 30-year mortgage with about 26.5 years left when we were able to refinance to a 15 year with not much extra in payments. I’m still riding that wave so we haven’t resumed the extra payments that we’d been making before (they’re now part of our regular payment).

  2. I started paying extra a few years ago. It was very important to pay off my mortgage to coincide with retirement June 2017. I am in the last years of my mortgage and the principle portion is upwards of 80% so extra payments have a lot of impact.

  3. That is a pretty cool rule of thumb and it makes sense now that I think about it. We don’t plan on accelerating payments on our mortgages at this time though. I just can’t make myself do it at the interest rates we have locked in.

  4. I’ve been thinking about making extra payments for a while now.

    After some research, I have elected to instead max retirement accounts. My wife and I don’t yet take full advantage of these accounts, and with a mortgage rate of 4.125% and an expected return on our portfolio of 8%, we’re electing to fully fund retirement accounts first.

  5. That is a handy rule of thumb. My girlfriend has a little less than 12 years left on her mortgage. If we ever combine finances, we would pay the mortgage off early.

  6. I can’t wait to make extra mortgage payments…Sooooo not a priority with our other debts right now but in a few years we will be reallocating most of the debt monies into extra mortgage payments.

  7. Your thumb rule is pretty good and if you are able to make that extra payment each month, you can easily shave off those months of payment proportionately. I have been making that extra payment but in small amount to get that extra benefit

  8. Nice post! All you ever hear is do or don’t do this but its nice to understand exactly how it would work. For the longest I thought you would need to make the payment as if it was the whole payment not just principle. So if the entire payment was 1k you would need to make 1k and just say this goes to principle only. At that rate though it seems as though I would have my mortgage paid off way sooner than I thought.

    • Yes, you’re probably getting some extra payoff benefit. As you approach the end of your mortgage your assumption would hold true, since by the end you’re applying nearly all of your payment toward principle.

  9. Nice, I like ‘rule of thumb’ ideas as they allow quick visualization of value. Personally I haven’t got a mortgage, but certainly would start paying it down faster providing the other funds and tax advantaged accounts were maxed out.

  10. Nice way to quickly calculate and motivate. It should be esp. easy and motivating to do this at the start of the term as most of the payment is going towards interest and it is “easy” to knock a month off. We are not paying anything extra any time soon. Just not in the priority list for us and our interest is 3.2% so we are not sweating to get there fast enough either. We have to get back to saving as we were saving before we bought a house, first.

  11. I make extra payments every month, and have built a spreadsheet that shows my original payment schedule, and the amended payoff amounts show my new payoff date – but this is a nice rule of thumb! It will give me something easy to visualize when I make my extra payments every month!

  12. I have always wanted to send in some extra mortgage payments but it never seemed to happen. Perhaps I will be able to do so when I am on better financial footing in a year or two.

  13. This is a good rule of thumb — never thought about it that way before, but it makes sense.

    When my wife and I were paying off our mortgage, we did the same thing that commenter Spiffi does — we made a detailed spreadsheet that would do the calculations for us. It allowed us to run hypothetical scenarios to see how much of an impact each extra payment would have over the long run. I found it to be an extremely useful tool. I would recommend this tactic to anyone who is serious about aggressively paying down a mortgage.

    Also, I hate to nit-pick here, but the portion of each payment that reduces the mortgage loan balance is the “principal”. The word you used (principle) means something entirely different.

  14. We were making extra payments (biweeky, so 2 extra half-payments per year) when we were in a 30-year mortgage at 5+%, but since refi-ing down to a 15-year mortgage at 3.25%, we stopped making formal extra payments since those extra payments are basically worked into our monthly payments now.

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