We give you a detailed analysis of this factor and a couple of reasons for making extra payments that will finally throw light on the subject.

Under Normal Conditions

The data we are about to give you was taken from a mortgage calculator, established with a macro on an Excel spreadsheet. As you read on, take note of the data and make a little chart, so that you will have the numbers clearly in front of you: Without making extra payments, a mortgage for $20,000 set for 10 years at an interest rate of 6% would have the pre-established 120 instalments to pay.

As A Consequence

As a consequence of these premises, the monthly payment you have to turn in is $222.04 for 120 months. During this program you will be paying a total amount of $6,644.92 on interest, for the complete loan. Now, let us introduce extra payments:

With Extra Payments

Let us suppose you want to make an extra payment of $50 a month. Every month, you will make a total payment of $272.04. At this rate, your payments will reach the total sum owed before the established term. The new length will be 93 months, just over 2 years before the initial time span. Consequently, the amount you will have payed on interest is 4,993.27. A simple mathematical operation will give you a sum of 1,651.65 paid less on interest.

Two Main Reasons To Do This

The first one is that you save $1,651.65 on interest, and the other reason is that the loan will finish earlier. The logical question here is, “Why don’t I just take a loan for a shorter period?” Well, it is fair enough to give you the cold figures. An approximate length would be 8 years, meaning 96 months, only three more than the 93 that you would get in the case of 10 years with a $50 extra payment, right?

Make A Pause

Take note of these figures in your chart and continue. Now, are you ready for the news? 93 payments of $272.04 mean $25,299.72. On the other hand, 96 payments of 262.83 give you a total paid sum of $25,231.68. You save 68 bucks. On a span of 8 years! Is it all that much difference? Nope. But what if I told you that you can happily sacrifice those 68 bucks in favor of another, more important advantage?

The Real Advantage Of Making Extra Payments

There is a difference between the established payments and the extra payments. The established payments are obligatory. The extra payments can be made at your leisure, and depending on your cash availability. So, you can make good use of your yearly bonus and put it on extra payments of your loan. Next month you have no extra cash, you don’t pay a thing.

Control

So, while a shorter period would tie you to a fixed payment which is higher, a voluntary extra payment can be stopped if you find it hard to make ends meet. You would then have control of your monthly payment, avoiding a tighter budget and therefore the risk of delinquency, which would in turn affect your credit report.

You can even make higher extra payments, should you receive an increase in your salary or if your business grew, ending the loan even sooner.