Theres a lot to think about when youre in the market for a new home. The most important is the mortgage payment. Youre going to have to make 12 of them every year — unless you decide to make more!.
A significant portion of your monthly mortgage payment is allocated to interest at the beginning of the loan, not to pay down the initial amount you borrowed. When calculating your annual budget, think about adding an additional mortgage payment to help reduce the principal loan balance.
Ready to slash years off your mortgage and save thousands in interest? The secret is simple: make one extra mortgage payment each year.
It might sound like a small change but those extra payments add up fast leading to big savings and a faster path to homeownership.
Here’s how it works:
- Interest savings: When you make an extra payment, it goes directly towards your principal balance, reducing the amount you owe and the interest you pay over time.
- Equity boost: As your principal balance shrinks, your equity in the home grows. This means you’ll have more financial flexibility and a bigger profit potential when you sell.
- Faster payoff: Those extra payments can shave years off your mortgage term, meaning you’ll be debt-free and enjoying your home sooner.
But how much can you really save? Let’s take a look:
Example:
- Mortgage amount: $350,000
- Interest rate: 6%
- Loan term: 30 years
- Regular monthly payment: $2,098
Scenario 1: No extra payments
- Total interest paid: $405,434
- Total cost of the loan: $755,434
- Payoff date: January 2054
Scenario 2: One extra payment of $2,098 each December
- Total interest paid: $318,059
- Total cost of the loan: $668,059
- Payoff date: January 2049
Savings:
- Interest: $87,375
- Time: 5 years
That’s a whopping $87,375 in interest savings and 5 years shaved off your mortgage term!
Now, let’s say you can’t swing a full extra payment each year. No need to worry, even a small increase each month can have a significant impact.
For example:
- Increase your monthly payment by $175 (1/12th of your regular payment).
- Total interest paid: $319,441
- Total cost of the loan: $669,441
- Payoff date: January 2049
See? You still save a significant amount of interest and time.
Ready to get started? Here are a few ways to make those extra payments:
- Lump sum: Save up throughout the year and make a lump-sum payment at the end of December.
- Extra monthly payments: Divide your regular payment by 12 and add that amount to each month’s payment.
- Biweekly payments: Some lenders offer biweekly payments, which essentially means you make 26 half-payments each year, equaling 13 full monthly payments.
Before you start making extra payments, check with your lender to ensure they don’t charge prepayment penalties. Also, confirm that your extra payments are applied to the principal balance.
Remember, even one extra payment a year can make a big difference in your mortgage journey. So, start saving today and enjoy the benefits of owning your home sooner and for less!
Making one extra payment every year…
When you make an additional payment, you have the option to apply it toward your loans principal. This will gradually lower the amount owed on your loan and may eventually result in a reduction in the interest you pay.
As your loan balance decreases, the amount of interest added to each payment also drops. Its not much at first, but it can add up to significant savings over time. You may be able to lower the total amount of time you have to make those monthly payments and save thousands of dollars in interest over time.
Making that extra mortgage payment will expedite the building of your home equity, which is another excellent reason to do so. If your home’s value stays the same or rises over time, you will have more equity in it as you pay down your loan balance.
Building equity in your house is similar to having money in the bank because it raises the investment’s value and can increase your profits if and when you decide to sell. Plus, having equity gives you the option to take out home improvement loans if you need them.
Furthermore, since you will likely have to pay private mortgage insurance (PMI) if your home’s equity is less than 2020 percent, making extra mortgage payments can help you reach that threshold sooner and possibly eliminate PMI depending on the financing or loan program you apply for. This could save you even more each month.
Shave years off your mortgage!
Generally speaking, you can reduce the length of your 30-year mortgage by about four to five years by adding one extra payment to your mortgage each year at the beginning. Instead of 30 years, you might be able to pay off the mortgage and become the sole owner of the house in 25 to 26 years.
Paying extra on your loan: The RIGHT way to do it! (Monthly vs Annually)
FAQ
What does making 1 extra mortgage payment a year do?
How do I pay off a 30-year mortgage in 15 years?
What happens if I pay $500 extra a month on my mortgage?
What happens if I pay an extra $2000 a month on my mortgage?
What happens if you pay extra on a mortgage?
For example: Savings: By making extra mortgage payments, you may not be able to save as much as you normally would. Monthly payments: Paying extra on a mortgage doesn’t normally lower your monthly payment, so you’ll still need to keep that regular monthly payment in mind.
When should I pay extra on my mortgage?
You can make additional payments applied to your principal at the time your mortgage payment is normally due, or earlier. “Or you can do so at more frequent intervals during the year,” he says. Any time you pay extra on your mortgage, you need to indicate to your lender that the money should go toward loan principal — not interest.
Can I make extra payments on my mortgage?
You can apply extra payments directly to the principal balance of your mortgage. Making additional principal payments reduces the amount of money you’ll pay interest on – before it can accrue. This can knock years off your mortgage term and save you thousands of dollars.
Should you pay off your mortgage with two extra payments a year?
But by making just two extra payments per year, you can be free from your mortgage significantly faster and save tens of thousands of dollars in interest. Here’s how it works. If you find yourself with extra income, paying off your debts can be a rewarding and profitable enterprise.