Thirty years is a long time. If you’re chipping away at a mortgage each month, it can feel even longer.
But what if you could eliminate that financial ball and chain by paying off your mortgage early?
The truth is that you can shorten your loan’s term by four to six years on average if you can scrape together the equivalent of one additional mortgage payment each year.
You can free up money in your budget by paying off your mortgage and your outstanding loan balance sooner, money that you can use for other objectives.
We’ll explain how it operates in detail, provide you with savings estimates, and provide you with some budget-friendly tips for adding an extra mortgage payment.
Owning a home is a dream for many, and with that dream comes the reality of a monthly mortgage payment. But what if you could slash years off your mortgage and save thousands of dollars in interest? It’s possible with a simple strategy: making one extra mortgage payment each year.
Why Making an Extra Payment Matters
At the beginning of your mortgage, a significant portion of your payment goes towards interest, not principal This means you’re paying more for the privilege of borrowing the money than actually paying down the loan By making an extra payment, you can significantly reduce your principal balance, which leads to several benefits:
- Reduced Interest: As your principal balance decreases, the amount of interest you pay each month also decreases. This translates to thousands of dollars saved over the life of your loan.
- Faster Equity Buildup: As you pay down your principal, your equity in the home increases. This means you have more ownership in your property, which can be valuable for future home improvement projects or selling your home for a profit.
- Early Payoff: Making an extra payment each year can shave years off your mortgage term. Imagine being mortgage-free years earlier and having that extra money available for other financial goals.
How Much Can You Save?
The exact amount you can save by making an extra payment depends on several factors, including your loan amount, interest rate, and the length of your mortgage term. However, even a small extra payment can make a big difference. For example, making one extra payment of $1,000 on a $200,000 loan at 5% interest can save you over $10,000 in interest and shorten your mortgage by two years.
How to Make an Extra Payment
There are several ways to make an extra mortgage payment:
- Lump Sum Payment: Save up extra money throughout the year and make one large payment towards your principal.
- Extra Monthly Payment: Divide your monthly payment by 12 and add that amount to each monthly payment.
- Biweekly Payments: Divide your monthly payment in half and make payments every two weeks. This results in an extra payment each year due to the difference in the number of weeks and months.
Before You Start
Before you start making extra mortgage payments, ensure you have a solid financial foundation. Make sure you have an emergency fund and are on track with other financial goals like retirement savings. Additionally, check with your lender to ensure there are no prepayment penalties on your loan.
Making an extra mortgage payment each year is a powerful tool for homeowners looking to save money and pay off their mortgage faster. It’s a simple strategy with significant benefits, allowing you to achieve your financial goals and enjoy the freedom of being debt-free sooner.
Ready to explore the power of extra mortgage payments? Contact your loan advisor today to discuss your options and start saving!
Making 1 Extra Payment Can Save You Thousands of Dollars
Are you wondering how you can save money and pay off your mortgage sooner by adding one extra mortgage payment to your annual total?
Let’s say you have a 30-year fixed-rate mortgage on a $350,000 home with a 6% interest rate. Your regular monthly payment is $2,098.
- Pay-off date: January 2054
- Total interest paid: $405,434
- Total cost of the loan: $755,434
See how the total interest ends up costing more than the purchase price of the house? Ouch.
Making an additional $2,098 monthly payment every December will allow you to pay off your 30-year mortgage five years early and save approximately $87,375 in interest.
- Pay off date: January 2049
- Total interest paid: $318,059
- Total cost of the loan: $668,059
You read that right: $87,375 in interest savings.
But we realize that coughing up $2,098 around the holidays is tough.
So instead let’s imagine you increased your mortgage payment by 1/12th ($175) each month. With the same 6% interest rate, you’d end up paying $2,273 instead of $2,098.
The outcomes are almost the same, but you save more money on interest if you make an additional mortgage payment at the end of the year.
- Pay off date: January 2049
- Total interest paid: $319,441
- Total cost of the loan: $669,441
As you can see, those extra monthly payments pay off. To figure out your own potential savings, use an amortization schedule calculator.
3 Ways to Make an Extra Mortgage Payment
There are a few different ways you can make extra mortgage payments in a year.
It’s crucial to inform your loan provider that you want the additional payment applied to your principal balance using whichever method you decide on. Otherwise, extra payments might go toward the interest — which doesn’t help you pay off your mortgage faster.
Check out this guide on how to pay off your mortgage early if you’d like to look more closely at retiring your mortgage debt.
Paying extra on your loan: The RIGHT way to do it! (Monthly vs Annually)
FAQ
What happens if I pay 2 extra mortgage payments a year?
How many years does 1 extra mortgage payment take off?
Is it worth it to make an extra mortgage payment a year?
What happens if I pay $500 extra a month on my mortgage?
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.
Should you pay extra on a mortgage?
Paying extra on a mortgage may help reduce the amount of interest paid over time, in addition to the total amount of time it takes to pay back your mortgage. You may be able to reduce the amount of interest paid and the time it takes to pay back your mortgage by applying extra payments directly to the principal balance.
What should I know before making extra mortgage payments?
Here’s what you need to know before making extra mortgage payments. Making extra mortgage payments can reduce interest costs, lower debt, and save thousands of dollars over the life of your loan. Make extra payments through lump sum payments or by adding money to your mortgage payment each month.
How often should I make extra mortgage payments?
A typical mortgage has a 30-year term, meaning you don’t actually own your home until you’ve made payments for roughly a third of your life. So it makes perfect sense you might consider making some extra mortgage payments — i.e., payments in addition to your required monthly payments — a few times a year to try and shorten your sentence.