Last week we already looked at the details of the mortgage acceleration loan and biweekly payments as vehicles to use to pay your mortgage off early. Today I want to look at the advantages of adding additional money to your monthly payments. Towards the end of the article, I will take a look at which of these three strategies may be best for you and your family. Ultimately the decision is up to you, but I think if you want to pay your mortgage off early, then you need to make that decision and start implementing your plan next month.

The concept behind this strategy is very simple — you add extra money to your monthly payment. Most of us make electronic payments on our mortgages these days, so adding the money to your payment would be very easy to do. Simply go into your bank account and add an amount that you decide on to your monthly payment. Most if not all companies will automatically apply the funds towards your principal, which will save you money in the long run because of reduced interest.

The benefit of this strategy is that it does not take a large amount of money to make an impact in the length of your loan. Let me explain.

How does it work? When you closed your loan you should have gotten an amortization table in the stack of paperwork you were given. Odds are that you did not take the time to review it. An amortization table shows the amount of your payment that goes towards principal and interest. On a mortgage, you will notice that your payments are front loaded with interest, meaning at the beginning you are paying very little towards your principal. The reason behind why the bank does this is a conversation for another day.

Let’s use the same example that we did in the previous posts — a 30 year fixed loan for $200,000 at 4.25%. Here is the annual amortization table showing the amount of principle that remains after 12 months of payments:

Notice that after the first year you have paid $11,806.56 on your mortgage. Your principal has only been reduced by $3,371.73. Where has the rest of your money gone? Straight to interest. While it is great that the bank loaned you the money for your mortgage, paying extra each month can really turn the tables and let you minimize the amount of interest you pay. How do you determine the amount extra to pay each month? If you want to keep it simple, just add what you can afford to your payment. If you want to get more technical, you can use the amortization table to in effect, double your mortgage payment each year.

In our example, we paid $3,371.73 towards our principal during the first year of our mortgage. If we want to double our payment, we would divide that amount by 12 for the number of months in the year ($3,371.73 / 12 = $280.98). That would make the total amount we pay towards principal and interest $1,264.86 each month. While that does significantly increase the amount of our payment (we aren’t including taxes, insurance, and HOA dues), the impact the $280.98 makes is significant.

If we only paid an extra $280.98 per month, the impact would be significant. Take a look at this comparison:

You can save a whopping 10 years worth of payments on your mortgage by taking this simple step. Of course, you will need to make sure you have the best interest rate in Utah, and there is little chance that rates will fall much lower than they are right now. But just adding the amount we discussed you can save $60,467.00 in interest payments over the term of your loan. What can that money do over the 10 years? Let’s look…

What? Really? We can have over $144,821.00 in the bank if over the 10 years we are not making a house payment we are putting that money in the bank instead? Wow. That seems like a easy answer. Take the amount of interest saved and the amount of cash in the bank at the end of the 10 years an add it together and you have the true economic impact of that extra payment at over $200,000 for your family.

But let’s get even more aggressive and say at the end of each year we completed a similar analysis and figured out how much money would be going towards principal that year using the original amortization table. Looking at the table, during the second year of the loan we will have paid $3,517.86 towards the principal, or $293.16 per month. In this scenario, I would suggest you adjust your payment up by $12.18 per month so you will get the added benefit of those payments. If you completed this review each year of your loan, your 30 year loan will all of a sudden become a 15 year loan. If you saved your house payment of $983.00 over those same 15 years, you will have over $242,000 in the bank. That is an amazing amount of money saved.

The Bottom Line. If you are buying a home in Utah or refinancing your Utah mortgage, make sure you take a close look at your amortization table. Personally I have selected this strategy over the mortgage acceleration loan or the biweekly payments because of its simplicity to implement and ease to adjust. If you have a little extra money left at the end of the month, you should increase the amount that you pay towards you mortgage. In our example we saw how increasing the payment by less than $300.00 can cut more than 10 years off of you mortgage.

Unless you are really strapped for cash, you really owe it tow yourself and your family to figure out which strategy works best for you. If you don’t have extra money at the end of the month, I would suggest you simplify and curb your spending habits. It will make a huge difference.