By making strategic extra payments, you can significantly reduce the total interest paid and shorten the loan term. Using a loan example of $800,000 with a 6.125% fixed interest rate over a 30-year term, let’s explore how different payment strategies can save you money and time.
Baseline: No Extra Payments
When no extra payments are made, the loan is paid off in approximately 30 years, with total interest paid amounting to $949,900. This option offers predictability in terms of monthly budgeting, but it results in the highest overall interest cost.
Option 1: Bi-Weekly Payments
Switching to a bi-weekly payment plan involves making half of your monthly mortgage payment every two weeks. This results in making one extra full payment each year, which can have a significant impact on your loan:
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Results: Loan paid off in approximately 24.4 years.
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Total Interest: Approximately $742,700.
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Savings: About $207,200 in interest and 5.6 years sooner than the baseline.
Option 2: One Extra Payment Per Year
By making one additional annual payment directly towards the principal—either as a lump sum or spread out monthly—you can also see substantial savings:
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Results: Loan paid off in approximately 24.5 years.
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Total Interest: Approximately $744,800.
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Savings: About $205,100 in interest and 5.5 years sooner than the baseline.
Option 3: Bi-Weekly Payments + One Extra Payment
Combining the benefits of bi-weekly payments with an additional annual principal payment provides the maximum savings:
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Results: Loan paid off in approximately 22.5 years.
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Total Interest: Approximately $676,600.
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Savings: About $273,300 in interest and 7.5 years sooner than the baseline.
Bi-Weekly Payments
Total Interest $742,700
Interest Saved $207,200
Years Saved 5.6
Extra Annual Payment
Total Interest $744,800
Interest Saved $205,100
Years Saved 5.5
Both Combined
Total Interest $676,600
Interest Saved $273,300
Years Saved 7.5
So
Making small, consistent extra payments towards your mortgage can greatly reduce the amount of interest you pay over the life of the loan, help you build equity faster, and enable you to own your home years sooner. By choosing the payment strategy that best fits your financial situation, you can achieve substantial savings and gain greater financial freedom.
