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.
For 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.
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?