When Shawn prepaid his mortgage in year 2, he saved nearly $50,000. When he waited to prepay the same amount until year 18, he “only” saved about $10,000. What’s the difference?
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The only difference in the two scenarios is TIME. The longer interest has to work, the more you will pay. This is how compound interest works.
- The longer you are in debt, the longer interest has to work.
- The longer you are in debt, the more interest you will pay.
- The sooner you can make a prepayment, the more you will save.
With compound interest, the earlier you make a payment, the more you will save. In this case, Shawn saved A LOT more by prepaying his mortgage earlier.