There may be occasions during the course of your mortgage when you want to make additional mortgage payments. Maybe you received a bonus that month or you finished paying off other debt. In addition to lowering the total amount of interest paid over the loan’s term, making additional mortgage payments may also help shorten the loan’s duration. Though there are usually advantages to making additional mortgage payments, there are other factors you might want to think about before doing so.
The answer depends on your financial situation and goals. While making extra mortgage payments can save you money on interest and pay off your loan faster, it’s not always the best financial move.
Here’s a breakdown of the pros and cons to help you decide if it’s the right move for you:
Pros:
- Save money on interest: This is the biggest advantage of prepaying your mortgage. The more you pay towards the principal, the less interest you’ll accrue over the life of the loan.
- Pay off your mortgage faster: Making extra payments can shave years off your mortgage term, allowing you to become debt-free sooner.
- Build equity in your home faster: As you pay down the principal, you build equity in your home. This can be beneficial if you plan to sell your home in the future.
- Reduce your debt-to-income (DTI) ratio: This can make it easier to qualify for other loans in the future.
- Get rid of private mortgage insurance (PMI) faster: If you have a conventional loan with a down payment of less than 20%, you’ll likely have to pay PMI. Making extra payments can help you reach the 20% equity threshold faster and get rid of PMI.
Cons:
- Less money for saving, investing, or other financial goals: Making extra mortgage payments means you’ll have less money available for other financial goals, such as saving for retirement or investing.
- Ties up money in your home: When you make extra mortgage payments, that money is tied up in your home and not easily accessible. This could be a problem if you need to access that money for an emergency.
- Smaller mortgage interest deduction: The mortgage interest deduction can save you money on your taxes. However, if you prepay your mortgage, you’ll lose this deduction.
- Possible prepayment penalty: Some mortgages have prepayment penalties, which means you’ll have to pay a fee if you pay off your loan early.
Here are some factors to consider when deciding whether to pay extra on your mortgage:
- Your monthly budget: Can you afford to make extra payments without sacrificing other important financial goals?
- Your income: Is your income stable? If not, you might want to save those extra funds for the times when you don’t have as much coming in.
- How long you plan to stay in your home: If you’re already close to paying off your mortgage, it might make sense to keep your payments as-is and put those funds elsewhere.
- Do you have an adequate emergency savings fund? If not, focus on building these savings first.
- Are you saving enough for retirement? If you’re not sure if you’re saving enough, use a retirement calculator.
- Do you have credit card balances or other loans with higher interest rates? Because mortgages aren’t as expensive as other forms of debt, it often makes more sense to pay off credit cards or other loan balances before your home loan.
If you answered yes to any of these questions it might be better to hold off on prepaying your mortgage until you’re more financially secure.
That said, if it fits into your budget, you want to get rid of the debt, and you’re in good shape with other savings or investing goals, make extra payments on your mortgage. Every additional dollar shaves time off your loan and saves you interest.
Here are some ways to prepay your mortgage:
- Make one extra payment once a year: This is a simple way to start prepaying your mortgage.
- Make biweekly payments: This is another easy way to prepay your mortgage. By making half payments every two weeks, you’ll end up making an extra mortgage payment each year.
- Make additional payments at your discretion: You can make extra payments at any time, with any amount. This is a good option if you have a windfall, such as a bonus or inheritance.
- Recast your mortgage: This involves paying a lump sum towards your loan and then having the lender reamortize your loan with a new payment schedule. This can shorten your loan term and save you money on interest.
No matter which method you choose, make sure your mortgage servicer applies the extra payments towards the loan principal. If you don’t specify this, the extra money will go towards your next monthly mortgage payment instead, and you won’t save as much on interest.
Prepaying your mortgage can be a great way to save money and pay off your loan faster. However, it’s important to consider your financial situation and goals before making a decision.
Savings Accounts & CDs
It’s never too early to begin saving. Open a savings account or open a Certificate of Deposit (see interest rates) and start saving your money.
Chase credit cards can help you buy the things you need. Many of our cards offer rewards that can be redeemed for cash back or travel-related perks. With so many options, it can be easy to find a card that matches your lifestyle. Plus, with Credit Journey you can get a free credit score!.
Chase Auto is here to help you get the right car. Apply for auto financing for a new or used car with Chase. Use the payment calculator to estimate monthly payments. Check out the Chase Auto Education Center to get car guidance from a trusted source.
You can get advice from a group of business experts at Chase for Business who are experts at managing payroll, supplying credit solutions, and assisting with cash flow improvement. Choose from business checking, business credit cards, merchant services or visit our business resource center.
Take the first step and get preapproved.
Choose the checking account that works best for you. See our Chase Total Checking® offer for new customers. Use your debit card to make purchases and bank from virtually anywhere using a phone, tablet, or computer. There are over 15,000 ATMs and over 4,700 branches.
Should You Make Extra Mortgage Principal Payments?
FAQ
What happens if I pay an extra $100 a month on my mortgage principal?
Is it better to pay extra on principal monthly or yearly?
What happens if I pay an extra $500 a month on my mortgage principal?
When should you not pay extra on a mortgage?
Should I make additional principal-only payments on my mortgage?
The thought of paying hundreds or thousands of dollars a month for decades can be overwhelming. Making additional principal-only payments on your mortgage can reduce the amount of interest you pay and also help you pay your loan off sooner. The key is to specify to your lender that you want your extra payments to be applied to your principal.
Should you pay extra principal on a mortgage?
Make extra payments each month, pay off your loan faster, and save thousands in overall interest. You will be surprised how fast the savings can add up by paying a bit more each month. So what is the effect of paying extra principal on a mortgage? 1. Save on interest
Do extra payments count toward a loan principal?
Terms may apply to offers listed on this page. Payments made on a mortgage in addition to your regular monthly payment will count toward the loan principal. Extra payments can be beneficial because they apply directly to your loan principal, helping you pay off your loan faster and with fewer interest fees.
Should I pay extra on my mortgage?
Most mortgages provide you the option to pay extra on your principal if you wish. You could, for example, pay an extra $50 or $100 each month, or make one extra mortgage payment a year. The benefit in taking this approach is that it will, over the life of the loan, reduce the total amount of interest you pay.