Paying extra toward your mortgage saves you money because you pay down your principal, which gives the bank less principal to charge you interest on. (Tip: You have to make sure you don't owe a prepayment penalty and that your bank applies your extra payment to the principal, not the interest. Some banks require you to write a separate check or make a separate online payment to make your intentions clear.) Because mortgages are big debts over a long period of time, the reverse compounding feels downright miraculous. To see how much money you could save by prepaying your mortgage, click here for a great calculator.
If the Stricklands were able to commit $200 extra per month toward their mortgage principal, it would save them $40,778 over the rest of the loan. About $500 in extra principal would garner an $82,985 savings. And if they can swing $1,000 in extra principal per month on a 25-year loan, they will save $148,620 and pay their mortgage off 11 years early.
This most ambitious plan may actually be possible for the Stricklands not only because of the savings I found for them, but also because they were already trying to pay a chunk of extra money toward their home-equity line each month. That is a smaller loan at a lower interest rate and you can save money by paying the loans with the highest interest rates first. So, I advised them to redirect those funds to prepaying their mortgage instead and just pay the minimum on their home equity line.
"It's going to take diligence to do it, but having advice on how to redirect our money has made a big difference," Mike Strickland said. "And I'm excited about that."
So, there you have it. The Stricklands will save $16,214 right away by switching cell phone plans, getting an aggressive cash back card, price matching at Target, switching to individual health insurance with a different carrier and refinancing their mortgage and home equity line. That savings are immediate and can help them in the short term -- plus it repeats every year. If they can then roll some of that savings into prepaying their mortgage, they can save up to $148,620 more.
That savings will unfold in the next 12 years, still not a long time.
If you were to add up their repeat savings, then their true total saved in the next dozen years is $343,188. And here's my favorite part: The savings strategies I showed the Stricklands are easy. No high finance involved! Plus every one of these savings strategies is painless. They won't have to scrimp or sacrifice to achieve them.
My job here is done. Next!
For my next savings makeover, I hope to work with a family that has credit card debt to show that there are savvy steps they can take to make that debt disappear faster and get started on the path to BIG savings.
Click here to learn where you can find a copy of "Save BIG" by Elisabeth Leamy, ABC News consumer correspondent.
Click here for more savings resources available on Elisabeth Leamy's Web site.