What happens if you pay an extra $1 a day off your mortgage? Paying an additional $1 a day towards your mortgage can lead to significant savings in interest and a reduction in your loan term.
For example, on a $500,000 mortgage, consistently paying an extra $1 each day can surprisingly shorten your repayment period and save you thousands of dollars over the life of the loan.
The Impact of a Small Daily Payment
Even a seemingly small extra payment of $1 a day, which totals about $30-$31 a month (or $365 a year), can have a noticeable effect on your mortgage, primarily because these additional funds go directly towards reducing your loan's principal. By reducing the principal, you reduce the base amount on which interest is calculated, leading to compounding savings over time.
Consider the following illustration based on a common mortgage scenario:
| Original Mortgage Amount | Extra Daily Payment | Total Extra Annual Payment | Reduced Repayment Period | Total Interest Saved (Approx.) |
|---|---|---|---|---|
| $500,000 | $1 | $365 | 19 years, 9 months | $5,470 |
This example shows that a consistent $1 daily payment on a $500,000 mortgage can shorten a typical 30-year loan by more than 10 years and save approximately $5,470 in interest.
How Extra Payments Make a Difference
When you make an extra payment on your mortgage, especially early in the loan term, that money usually goes directly to reduce your principal balance. This is crucial because:
- Interest is calculated on the principal: A lower principal means less interest accrues each month.
- Accelerated equity building: By chipping away at the principal faster, you build equity in your home more quickly.
- Shorter loan term: As less interest accumulates and the principal is paid down faster, you reach the end of your loan term sooner.
Benefits of Making Small, Consistent Extra Payments
Even seemingly small extra payments can yield substantial long-term benefits:
- Significant Interest Savings: The most direct benefit is the reduction in the total interest paid over the life of the loan.
- Faster Debt Freedom: You become mortgage-free sooner, freeing up a substantial portion of your monthly budget.
- Increased Home Equity: Accelerating principal payments helps you build equity in your home more rapidly, which can be an asset for future financial needs or plans.
- Financial Flexibility: Getting rid of mortgage debt sooner can provide greater financial freedom and reduce financial stress.
- Peace of Mind: Knowing you're actively working to pay down your largest debt can offer significant psychological benefits.
While the exact figures will vary based on your specific mortgage's interest rate, original loan term, and remaining balance, the principle remains the same: any extra payment, no matter how small, can help you pay off your mortgage faster and save money on interest.
