1 Trick Homeowners Can Use to Save $31,155 on Their Monthly Mortgage Payments

By Selena Maranjian Markets Fool.com

While I encourage people to save 100% down for a home,
a mortgage is the one debt that I don't frown upon.
-- Dave Ramsey

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Dave Ramsey has some good financial advice, but aiming to buy a home with cash isn't his best recommendation. It would take most of us a long time to save enough to buy an average-priced home. (As of January, the median sales pricefor an existing home sold in the U.S. was $228,900.) Saving just a 20% down payment of $45,780 would take a while.

Image source: Getty Images.

Thus, most of us need mortgages -- and many of us are currently making monthly mortgage payments. Here's a trick you can use to save gobs of money as you pay off your mortgage.

If you bought that $228,900 house with a 30-year fixed-rate mortgage and a 20% down payment, this trick might save you $31,155, or more, over the life of your loan. (It will help, of course, if around the time you were getting pre-approved for your initial loan, you shopped around for the best interest rates.)

Pay more than the minimum!

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So what's the trick? Just pay more. Your scheduled mortgage payments are designed to last 30 years, but if you pay more each month -- or each quarter or each year -- you can pay thousands of dollars less in interest and shave many years off your loan. With this trick, you'll still have your monthly payments -- but you'll have fewer of them. You'll pay more each year, but all your monthly payments together will total far less than if you didn't employ the trick.

Paying more and shortening the life of your loan can be especially attractive for people not too far from retirement. Imagine, for example, being 50 years old with 25 years left on your mortgage -- most people would rather not be retirees in their 70s still paying off mortgages while living on limited incomes.

The table below shows just how much someone might save by making various kinds of monthly prepayments. It assumes a 30-year $183,120 fixed-rate mortgage taken out at an interest rate of 4.5% in order to buy that average $228,900 home. The regular monthly payment for that loan would be $927.85.

Payment Method

Pay Off Loan in...

Total Interest Paid

Total Interest Saved

Minimum payment

30 years

$150,900

$0

$100 extra monthly

24 years and 7 months

$119,745

$31,155

$200 extra monthly

20 years and 11 months

$99,728

$51,172

$500 extra monthly

14 years and 8 months

$67,021

$83,879

Source: Author calculationsat mtgprofessor.com.

Image source: Getty Images.

Small sums, big differences

As the table above makes clear, if you can manage to make an extra $500 monthly payment on that loan, you can shrink its length by more than half -- saving yourself more than $80,000 in the process. That might be a tall order, though. If so, pay only $100 extra per month (that's just $25 or so per week), and you can still shave off more than five years and $31,155.

You may well have bought a house for more than $228,900, though. If so, here's how much you might save by paying $250 more per month for a variety of loans. The table below shows several home prices, and assumes that for each, you borrow 80% of that sum at 4.5%, paying 20% down, in a 30-year fixed-rate mortgage.

Home Price, Paying $250 Extra per Month

Regular Monthly Payment for 360 Months

Paying $250 Extra Monthly Shortens Loan to

Total Interest Saved

$300,000

$1,216

255 months

$65,034

$400,000

$1,621

274 months

$71,185

$500,000

$2,027

288 months

$75,497

$750,000

$3,040

308 months

$82,180

$1 million

$4,053

320 months

$86,013

Source: Author calculationsat mtgprofessor.com.

Your particular situation will be somewhat different, of course. When it comes to how much house we can afford to buy, each of us will differ. How much extra money we can allocate to mortgage payments will differ, too.

Few people opt for 15-year mortgages, even though they help you pay off your home much faster and tend to sport lower interest rates. That's because they come with significantly higher monthly payments, which many folks are nervous about committing to, or are simply unable to swing. You can nevertheless approximate a 15-year loan, though, by making extra payments. If you're aggressive about it, you can turn your 30-year loan into a 15-year one, or an even shorter one.

If you're carrying a mortgage, spend a little time thinking about how much extra money you might be able to send in to your lender regularly. It can save you many tens of thousands of dollars.

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