Posted on September 3rd, 2020
There are all sorts of gimmicks, tips, and tricks out there to pay down the mortgage a little (or a lot) quicker.
And one that sounds relatively painless is the simple rounding up of one’s mortgage payment.
So if you owe $1,550 each month, paying $1,600 instead could make a sizable dent in your mortgage over the years, thereby reducing the loan term and saving you lots of money in interest.
But just how effective is rounding up your mortgage payment? Well, it depends. Let’s take a look at a couple of potential scenarios to find out.
It Depends How Much You’re Actually Rounding Up
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- The biggest factor is your actual monthly mortgage payment
- Which will determine how much extra you pay each month
- Assuming you round up your payments to the nearest whole number
- It can be quite different depending on that original payment amount
First off, you need to take a look at your actual monthly mortgage payment. If it’s $1,599 a month, rounding it up to $1,600 will do virtually nothing to save you money on your mortgage.
If anything, you might just confuse your loan servicer when sending in what appears to be the wrong payment amount.
Conversely, if your monthly home loan payment is $1,501, bumping it up to $1,600 will lead to considerable savings.
Of course, if you have to increase your payment by nearly $100 a month, it’s no easy task, especially if you have other expenses to worry about, or high-interest debt that needs to be paid down/off as well.
Always keep that in mind when deciding whether it makes sense to pay even more money toward your mortgage.
With interest rates so cheap, a mortgage is probably the least expensive debt you’ve got, which begs the question, why rush it?
Let’s suppose your mortgage payment lands somewhere right in the middle:
Loan amount: $200,000
Loan type: 30-year fixed
Mortgage interest rate: 4%
Monthly mortgage payment: $954.83
Extra payment (monthly): $45.17
Rounded-up payment: $1,000
So let’s say you’ve got a $200,000 mortgage, and your required monthly mortgage payment is $954.83.
Instead of making the standard payment, you could round it up to an even $1,000, paying an extra $45.17 a month toward principal (make sure the rounded-up amount does indeed go toward principal!)
For many people, $45 bucks could be negligible, small enough to go unnoticed each month.
Yet by making that $1,000 payment as opposed to $954.83, you’d save a whopping $13,606.49 in interest over the life of the loan and shave nearly 2.5 years off the term.
Not bad for paying a little bit extra each month, right? It’s a simple form of forced savings that you might not even miss in your bank account.
Let’s look at another example, this time a larger loan amount with a slightly higher interest rate:
Loan amount: $500,000
Loan type: 30-year fixed
Mortgage interest rate: 4.5%
Monthly mortgage payment: $2533.43
Extra payment (monthly): $66.57
Rounded-up payment: $2,600
In this scenario, you’d pay off the 30-year loan only 1.5 years earlier, but you’d save nearly $25,000 in interest over the loan term.
The interest savings are larger because more interest is due on a larger home loan, but the term isn’t reduced as much because the rounded-up payment is smaller relative to the larger payment due at that loan amount.
Still, $25,000 in savings for paying an extra $67 bucks a month ain’t too shabby.
Remember, these scenarios assume you’ll hold the loan to term, which many homeowners do not.
Savings From Rounded-Up Mortgage Payments Are Highly Variable
- It isn’t a very scientific approach to paying down your home loan
- Since the savings are completely random based on the rounded-up amount
- You might be better served with an actual plan/goal
- Such as trying to pay off your mortgage in X amount of time
- Or attempting to save X dollars in interest over the loan term
All said, the savings will vary based on a number of factors, such as how large the loan is, what the interest rate is, and how much larger the rounded-up payment is.
It also depends on when you start rounding up, and how often you do it. If you only round up your payment every other month, or if you start several years after your loan term began, the savings will be reduced.
Another potential flaw to the round-up method is that it takes discipline, unlike say a 15-year fixed or shorter-term loan where the higher payments must be made each month.
In other words, if you don’t stick to the plan and round up your payments each month, the savings won’t be realized.
Of course, this can be a godsend too if money gets tight and you no longer have the extra cash to make slightly larger payments.
It’s also not the best method for those with a very specific goal, such as paying the mortgage off before retirement.
But if you want something simple and easy, you can certainly give it a try.
In summary, there are some obvious pros and cons, but rounding up mortgage payments does work, and it can save you thousands in interest, while allowing you to own your home free and clear a bit earlier.
Be sure to do the math for your particular loan to see if it makes sense. You might find that your extra cash is better off somewhere else.
Pros of Rounded-Up Mortgage Payments
- Very easy to implement, can stop at any time
- Shouldn’t cost much more money each month
- Can save you a ton of money in interest over the years if you stick with it
- Will shorten your loan term by years in some cases
Cons of Rounded-Up Mortgage Payments
- May not save you much money if rounded up payment is negligible
- A random way of paying the mortgage off early (no clear goal)
- Loan servicer may get confused if you send in the “wrong payment amount”
- Can stop at any time so it requires discipline in order to be effective
(photo: Derek Giovanni)
Published at Thu, 03 Sep 2020 14:43:27 +0000