Putting a little extra cash toward your mortgage is a great money saver. These prepayments go directly toward paying down the principal of your loan. As a result, your loan is paid off faster and you end up saving a lot on interest payments.
But bear in mind that any extra payments you make to your mortgage lender get locked up in your home's equity. Before you decide to pay an extra $100 a month toward your payment, make sure there are no better uses for your money, from long-term investments to paying down high-interest debt.
To figure out whether prepaying is the right choice for you, calculate the interest savings from prepaying your mortgage. To figure those savings, enter your mortgage information, including the loan amount, interest rate and term of the loan, into
Say you borrowed $200,000 via a 30-year fixed-rate mortgage at a 6% interest rate. These days, mortgage rates have come down considerably. BankingMyWay.com's mortgage site shows mortgages from
at 5.125% and
Your monthly principal and interest payments are $1,199, and over the life of your loan you'll end up paying $231,677 in interest. If you prepay your mortgage by $100 a month, you'll save a total of $49,139 and pay off your loan in less than 25 years.
By clicking on the View Report button of the calculator, you'll see how the prepayments affect your equity in your home. Say you decide to sell your home after 10 years. Without prepayments, you'll end up owing $167,371 on the remainder of your $200,000 mortgage. If you prepaid the $100 a month, however, you'd only end up owing $150,983. That's a $16,387 increase in home equity from a $100-per-month investment over 10 years (or a $12,000 investment).
Next, consider your return if you invested $100 a month instead of prepaying your mortgage. Using BankingMyWay.com's
, enter $0 for the starting balance, 10 years for the duration and $100 for monthly contributions. This calculator compares multiple rates at the same time.
Let's say you find a money market account (MMA) that pays 1% interest on your deposits. You'd have $12,623 after 10 years. Check out BankingMyWay.com to find offers like the 1.5% MMA offered by Bank of Utica or the 0.35% MMA offered by TD Bank's TD Banknorth.) If you invested that $100 a month in the stock market, you'd have $18,128 after 10 years, assuming an average annual return of 8%.
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This article was written by a staff member of TheStreet.com.