On December 9, 2011 I asked the question, “Should I pre-Pay My Mortgage” and ultimately provided my opinion on the matter. If you have not read that post please make sure to do so before reading on about the various prepayment strategies.
Hopefully you have followed my advice and have an emergency fund, maximized your money working for you and reduced higher interest rate debt. You are now ready to investigate different ideas surrounding pre-paying your mortgage loan. Here is strategy #1 – rounding up.
Rounding Up
The mortgage prepayment strategy of rounding up is very simple – round up your mortgage payment to a flat dollar amount. The amount by which you round up is up to you. Round up to the nearest $10, $25, $50, $100, $500 or even $1,000 mark. Let’s take a look at how much an impact rounding up could have on the prepayment of a $186,500 30 year fixed mortgage at a rate of 5%, closing today:
Overview of Mortgage with no Prepayment
- Minimum Payment: $1,001.17 (see why I chose $186,500 loan amount!)
- Payoff Date: Feb 1, 2042
- Interest Paid Over 30 Years: $173,922.04
Nearest $10:
- Total Payment: $1,010.00
- Additional Payment Per Month: $8.83
- Payoff Date: Jul 1, 2041
- Early Payoff: 7 Months
- Interest Paid Over Full Term: $169,846.43
- Interest Saved Over Full Term: $4,075.61
Nearest $25:
- Total Payment: $1,025.00
- Additional Payment Per Month: $23.83
- Payoff Date: Aug 1, 2040
- Early Payoff: 1 Year, 6 Months
- Interest Paid Over Full Term: $163,387.83
- Interest Saved Over Full Term: $10,534.21
Nearest $50:
- Total Payment: $1,050.00
- Additional Payment Per Month: $48.83
- Payoff Date: Mar 1, 2039
- Early Payoff: 2 Years, 11 Months
- Interest Paid Over Full Term: $153,745.63
- Interest Saved Over Full Term: $20,176.41
Nearest $100:
- Total Payment: $1,100.00
- Additional Payment Per Month: $98.83
- Payoff Date: Sep 1, 2036
- Early Payoff: 5 Years, 5 Months
- Interest Paid Over Full Term: $137,750.58
- Interest Saved Over Full Term: $36,171.46
Nearest $500:
- Total Payment: $1,500.00
- Additional Payment Per Month: $498.83
- Payoff Date: Oct 1, 2026
- Early Payoff: 15 Years, 4 Months
- Interest Paid Over Full Term: $76,821.16
- Interest Saved Over Full Term: $97,100.88
Nearest $1,000:
- Total Payment: $2,000.00
- Additional Payment Per Month: $998.83
- Payoff Date: Jan 1, 2022
- Early Payoff: 20 Years, 1 Months
- Interest Paid Over Full Term: $50,104.97
- Interest Saved Over Full Term: $153,817.07
We all knew the more you round up the more you would save, but now you can see real numbers based on the example. Even just an extra $8.83/mo can save you over $4,000 over the life of the loan. For the cost of two Starbucks coffees a month you could afford to buy two 60″ High Definition Televisions!
Do It Yourself
Run the numbers for yourself and find out how much you could save with the round up prepayment strategy.
