How can paying more end up saving you money? While that seems like an oxymoron, the reality is that there are several instances in modern life where paying more money ahead of schedule ends up saving you a lot of money at the end.
Your mortgage is an ideal example of this. In fact, if you "Google" the question: "What to do with $2k" you are going to see advice about paying down debt and then you would see many experts recommend that you sink that capital into the "principal" on your mortgage.
Here is what we mean: Let's say you have a 30 year mortgage that was for $100k. You have a standard 7% interest rate on the loan and you pay around $800 towards capital. If you were to put that $2k towards the principal of the loan - effectively reducing the debt to $98k instead of the original $100k, it would take months off the end of the mortgage. If you did this on a regular basis - say, paying an extra few hundred each month on that mortgage - you would see your repayment period shrink from 30 years to 20 or less.
That saves a ton of money on interest and allows you to constantly increase the amount of equity you have in the home. This is something many people don't consider and is often one of the best ways to save money over the long term.
The 15 Year Loan
Now, a lot of folks ask why they just shouldn't go for the shorter mortgage to begin with. After all, they save the same amount when they take the shorter loan, but the reality is that they are locked into that higher payment. Often, they may not qualify for the loan if they take the higher monthly debt. Sometimes, they want the ability to enjoy that little bit of financial "breathing room" that a longer mortgage provides.
Either way, it is possible to gain the same benefits by taking the shorter loan, but it could come at the price of an inflexible budget and a very cash strapped household.
How to Pay More
The best way to enjoy the benefits of paying more towards the principal on a monthly basis is to setup some sort of extra payment through the mortgage company or the bank holding the loan. You can electronically send a weekly or bi-weekly payment that helps you to consistently reduce the principal of the loan.
You will want to take the advice of many experts and make sure you won't be slammed with a pre-payment penalty if you end up paying off the entire loan far ahead of schedule. Many banks have dropped this issue because it is in their interests to have timely repayments, but don't let it become a surprise.
You can cut your mortgage repayment period substantially and pocket all of that interest you would have been forced to pay if you just pay a bit extra every month.