This Simple $5-a-Day Trick Could Save You Thousands on Your Mortgage—But Is It Worth It?

If you’re making payments on a 30-year mortgage, you’ll end up paying a lot in interest over time. In fact, depending on your interest rate and the size of your loan, you can end up paying thousands of dollars more in interest than you do toward the principal.

But what if you paid just $5 more per day toward your mortgage? The amount is so small you might not miss it at all. Could it really save you thousands of dollars in interest payments over the life of your loan?

Normal Repayment of a 30-Year Mortgage

Let’s say you have a 30-year fixed-rate mortgage of $350,000 at a 6.00% interest rate. Your monthly payment will be $2,098.43. If you make these payments monthly for 30 years, your total payments will be $755,433.66. Of that, $405,433.66 will be interest paid.

• Total monthly payment (principal and interest): $2,098.43
• Total payments over 30 years: $755,433.66
• Interest paid: $405,433.66

That’s $55,433.66 more than the amount borrowed that you’re paying in interest over the life of the loan.

Impact of the $5-a-Day Trick

To do the $5-a-day trick, you wouldn’t actually pay $5 each day. Instead, you’d set the $5 aside each day, for a total of about $150 each month.

Your payment of $2,098.43 each month would cover your typical principal and interest payment. The extra $150 would go straight to the principal. This would allow you to pay your mortgage off faster: the total balance would be paid off in 25 years and 3 months, which is 4 years and 9 months sooner.

How does that early repayment impact the amount of interest you pay? If you pay your $350,000 mortgage off in 25 years and 3 months while paying 6.00% interest on your loan, you’ll pay $76,000 less in interest over 30 years. That’s a 19% difference. (You’ll also pay less toward interest than you do toward the principal of the loan.)

• Monthly payment toward mortgage (principal and interest): $2,098.43
• Extra monthly payment toward principal: $150
• Total payments over 25 years and 3 months: $679,156.72
• Interest paid: $329,156.72
• Interest saved: $76,276.94

Is the $5-a-Day Trick Worth It?

At first glance, the $5-a-day trick seems like an obvious winner: for less than the cost of one latte per day, you can save $76,277.

But what if you invested that $5 a day instead?

Over the last century, the long-term annual return from the S&P 500 has been around 10%. However, that number is a little misleading. Accounting for inflation and market variations, the actual S&P 500 rate of return is closer to 6.68%.

Instead of putting that $150 per month toward your mortgage, you could invest $150 in an index fund that tracks the S&P 500. If you continued to contribute $150 every month, reinvested your earnings every month, and saw an annual rate of return worth 6.68%, you’d have about $171,850 at the end of 30 years ($54,000 in contributions, $117,850 in earnings).

Again, at first glance, the outcome seems obvious: $117, 850 in investment interest earned is significantly higher than $76,000 in mortgage interest saved. So you’d be better off investing that $150 every month rather than putting it toward your mortgage.

However, a second look shows that the two scenarios aren’t equal: if you’re investing for 30 years, rather than paying off your mortgage in just over 25 years, you’re putting more money into the investment over a longer period of time ($54,000 in the index fund on top of the $755,000 that you pay over 30 years for your mortgage principal and interest).

Instead, let’s say you pay off your mortgage in 25 years, devoting the extra $150 per month toward the principal. Once it’s paid off, you keep paying that same monthly amount ($2,248.43), but this time, you pay it into your index fund.

With a 6.68% annual rate of return, and 5 years of being invested with monthly earnings reinvested, you’d have about $160,000 (about $135,000 in contributions, and about $25,000 in earnings).

Earning $160,000 in 5 years instead of $171,000 in 30 years shows that both strategies could work for you. There isn’t a massive difference. Which you choose will likely come down to whether you prefer to have your mortgage paid off a few years earlier or not. The key is just to invest that extra $150 a month somewhere, whether that somewhere is your mortgage or the stock market.

But what if the interest rate on your mortgage and the amount you could earn from investing aren’t similar? What if you’re paying much higher or much lower interest on your mortgage?

The Impact of a Lower Mortgage Interest Rate

If you got a mortgage when interest rates were low, you could be paying 3% or less on your mortgage. This makes the numbers look a little different.

• Monthly payment toward mortgage principal and interest: $1,475.61
• Total payments over 30 years: $531,221.08
• Interest paid: $181,221.08

If you invested $150 per month for those 30 years, at the same 6.68% rate of return as above, you would end up with the same $171,850. That amount is not much less than what you’d pay in interest on your mortgage, so they sort of cancel each other out. There’s really no need to aggressively pay down your mortgage when you have a lower mortgage rate.

The Impact of a Higher Mortgage Interest Rate

What if the difference is in the opposite direction: you are paying 9% interest on your mortgage instead of 3%? This changes the outcome.

• Monthly mortgage payment (principal and interest): $2,816.18
• Total payments over 30 years: $1,013,824.50
• Interest paid: $663,824.50

If you used the $5-a-day trick when your mortgage is a steep 9%, you could pay off your mortgage in 24 years and 2 months, and you’d save over $150,000 in interest.

Then, that gives you nearly 6 years to invest. In this scenario, you would be better off paying off your mortgage early, and then investing that same amount every month for 6 years because you could end up with over $260,000 in that investment account after those 6 years.

If the interest rate on your mortgage is significantly higher than what you can earn through investing, you would be much better off making that small extra payment on your mortgage, allowing you to pay off your mortgage several years early and invest that monthly payment in the stock market instead of putting it toward interest payments.

The Bottom Line

The $5-a-day trick can save you thousands of dollars in interest payments on your mortgage, but it’s not worth it for every homeowner.

If the interest rate on your mortgage is roughly equal to the average rate of return you can earn from investing, there’s very little difference over time between putting that extra money toward your mortgage or investing it in a reliable index fund.

And if your mortgage interest rate is lower than the rate of return from investing, you can build significantly more wealth by making the standard payment on your mortgage and putting that additional $150 each month in an index fund instead.

If, however, the interest rate on your mortgage is higher than the rate of return you can earn from investing, you’ll be much better off using the $5-a-day trick. By putting an extra $150 a month toward your mortgage, you’ll pay it off nearly years in advance, saving you thousands of dollars in interest and freeing up more money to invest once your mortgage-free.