Question: I have heard that if one pays two additional house payment every year one can save up to five years in house payments--this is for a 30 year-loan. Is this true?
And is it worth while paying two additional house payments if one is trying to build up a reserve of money for the future. Liz, Indianapolis, IN
Answer: You can save a lot of money by accelerating your mortgage payments. But I would still place a priority on building up savings first.
You have a 30-year fixed rate mortgage with 25 years remaining. The mortgage amount is $200,000 at 6%. The monthly scheduled payment is $1,199. Since you mentioned two additional house payments a year I added an extra $200 to every monthly mortgage payment. (The extra $200 adds up to two additional monthly payments over the course of a year.) The total interest savings is $52,863 and the life of the mortgage is shortened by 6 years, 8 months.
There is nothing magical about two more payments. You could make one extra monthly contribution. In that case, the interest savings is $31,582 and the mortgage is shortened by 3 years, 11 months.
You can play with the numbers--and put in your actual ones--but there's no doubt that a faster paydown saves big bucks.
Nevertheless, I would focus on building up savings first. It's your margin of safety in a fragile economy with far too much job and income insecurity. It's money you can tap in hard times without goinginto debt. You can also dip into the savings when a good opportunity comes your way. That's why an emergency fund is also a oportunity fund.
You can always start paying more on your mortgage later on after you've built up a sufficient savings buffer.