How Much Should Your Mortgage Payment Be – Many homeowners look forward to the day the mortgage is paid off and the biggest debt of their life behind them. They may not realize that day can come much sooner if they pay just a little extra every month.

How mortgages work—and why modest extra payments can go a long way—is best explained with a typical amortization schedule. Basically, it is a table that lists all your mortgage payments in chronological order, from the first payment to the last.

How Much Should Your Mortgage Payment Be

How Much Should Your Mortgage Payment Be

In the amortization schedule, each monthly payment is divided into two parts: interest payment and principal payment. At the beginning of the amortization schedule, a large percentage of the total payment goes to interest and a small percentage goes to the principal amount. As you continue to pay off your mortgage over the coming months and years, the amount set aside for interest will gradually decrease, while the amount set aside for principal will increase.

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The total monthly or “periodic” payment (shown in column 5 of the table below) is determined using the following formula:

As you can see from the table, the monthly payment remains unchanged during the loan period. (For regional reasons, only the first five months and the last five months are visible).

The interest portion of the monthly payment (column 6) decreases over time as the capital is paid off. This is calculated by multiplying the interest rate (column 3 ÷ 12) and the remaining capital balance (column 4). Note that the interest shown in column 3 is an annual interest and must be divided by 12 (months) to get the periodic interest.

The main part of the monthly payment (column 7) is the total monthly payment, minus the interest payment for that month.

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The second table here is also a repayment schedule for a 30-year, 8% fixed-rate mortgage. However, this time, the borrower pays an additional $300 per month for the principal. (Although 8% is a high interest rate by today’s standards, but it works here as an illustration.)

This amortization schedule shows that if you pay an additional $300 per month, your mortgage life will decrease from 30 years to about 21 years and 10 months (262 months versus 360). It also reduces the total amount of interest paid over the life of the mortgage by $209,948.

As you can see, your mortgage balance is reduced by more than $300 per month. For example, if you pay an extra $300 per month for 24 months at the start of a 30-year mortgage, the extra amount that reduces your principal balance is more than $7,200 (or $300 × $24). In this example, the savings by the end of 24 months is $7,430.42. So you’d save over $200 over that period – and the benefits will only grow as you grow over the term of your mortgage.

How Much Should Your Mortgage Payment Be

That’s because as you continue to make the extra $300 in payments, a larger percentage of your regular mortgage payment goes toward principal rather than interest.

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Another benefit of reducing your mortgage debt is that it reduces your overall financial risk. If you lose your job or face another financial setback, you’ll have less debt to sleep with at night. Plus, the more equity you have in your home, the easier it will be to get a home loan or reverse mortgage if you ever want one.

The financial benefit of an accelerated mortgage payment is well illustrated by the above example. But does that mean it’s always the best choice? It depends on what other use you can get for the money. This concept is often called opportunity cost.

For example, if you have a significant amount of credit card debt, it may be a better idea to pay an additional $300 toward the balance. The median interest rate for credit cards in the pool was recently 19.62%, and most mortgages only charge a small fraction of that.

For example, let’s say you owe $10,000 on a credit card with an interest rate of 19% and pay a down payment of $300 a month. If you increase your payment to $600, you’ll save about $2,626 in total interest ($1,703 vs. $4,329) and pay off the balance 28 months earlier (20 months vs. 48).

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Then, assuming you don’t run up another big credit card bill in the meantime, you can start applying the extra $300 to your monthly mortgage payment.

Similarly, if you are an investment company, you can make $300 more in the stock market than you would with your mortgage. However, few of us invest, and the closest most of us get is paying off our mortgage faster.

Requires writers to use primary sources to support their work. These include white papers, government data, original reports and interviews with industry experts. Where appropriate, we also reference original research from other well-known publishers. You can learn more about the standards we follow to produce accurate and unbiased content in our editorial policy. Viewing showrooms and talking to real estate agents can make buying a home in Singapore a big deal. However, if we dig deeper, it seems that there are more complex aspects at play.

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