I am refinancing to a 15-year mortgage from a 20-year. If I pay one extra monthly mortgage payment per year, how many years will this knock off the mortgage?
Making extra payments will cut down on the length of your mortgage and the amount of interest you pay over the life of the loan. The specifics depend on the size of your loan and your interest rate. To figure out your savings, plug your numbers into our How Advantageous are Extra Payments calculator.
For example, making one extra payment on a 15-year, $300,000 mortgage with a 5% interest rate breaks down to about $200 extra per month. If you pay $2,572 each month instead of the required $2,372, for example, you can cut the number of payments down from 180 to 161 (from 15 years to 13.4) and the total interest paid from $127,029 to $111,653. The higher the interest rate, the more you'll save by making extra payments.
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But before you rush to make the extra payments, think about how else you could use the money. Interest rates are so low now -- especially since you've just refinanced to a 15-year mortgage -- that there may be better places to put the cash.
Paying down high-interest credit-card debt, for example, should be one of your first priorities -- the interest rate is probably a lot higher than what you're paying on your mortgage. Also make sure you have enough money in an emergency fund so you can avoid getting into debt if you have unexpected expenses. And be sure to contribute at least enough money to your 401(k) to receive your employer's match because that's a 100% return that you won't beat anywhere else.
To learn more about smart uses for the extra money, see Save or Pay Down Debt.
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