You might find that making extra payments on your mortgage can help you pay off your loan more quickly and with less interest than making payments in accordance with the loan’s original payment terms if you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster.
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Do you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loans original payment terms.
What is loan amortization?
Loan amortization is the process of paying off debt by making consistent principal and interest payments over time. For instance, if you pay a monthly mortgage, part of that payment goes toward interest and part toward principal reduction.
Typically, at the beginning of the loan term, the majority of each payment is used to pay interest and a smaller portion is used to reduce the principal balance. If you make regular payments, more of each subsequent payment goes toward decreasing your principal. This reduction of debt over time is amortization.
How can making extra payments help?
You can specify that additional funds be applied to principal when you make a payment that is greater than the minimum required. In a fixed-rate loan, you can lower your interest costs by paying down the principal faster because interest is calculated against the principal balance. Even small additional principal payments can help.
Here are a few hypothetical examples and some projected outcomes for additional payments. Consider that you have a $200,000 loan with a 4% interest rate that is fixed for 30 years. Your monthly mortgage principal and interest payment, if you make your scheduled payments, will be $955 for the duration of the loan, for a total of $343,739 (of which $143,739 is interest). You can reduce the length of your loan by more than 4 months if you pay $100 more in principal each month. Reduce the interest paid by more than $26,500 over 5 years. You can shorten the term of your loan by more than 8 years and lower the amount of interest paid by more than $44,000 if you pay $200 more in principal each month.
Making half-monthly payments every two weeks rather than a single full-monthly payment is another way to pay off your loan faster. By dividing your payments in this way, you can make an extra monthly payment every year (26 biweekly payments equal 13 monthly payments). Your principal balance could receive a direct credit for this additional payment. Make sure to ask your lender if this is a possibility for your loan before proceeding.
Assuming the same scenario as before, if you pay $477 50 every two weeks, as opposed to a single $955 monthly payment, could cut the length of your loan by more than four years and the amount of interest you pay by more than $22,000.
A little goes a long way
By paying your regular monthly payments, you’ll amortize (or reduce) your loan. But if it’s within your means, making additional principal payments can be a great way to speed up the repayment of your fixed-rate loan and reduce the amount of interest you have to pay.
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You could pay off your fixed-rate loan more quickly and pay less interest by making a small extra payment on your mortgage each month.
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FAQ
Is it smart to pay extra principal on mortgage?
In a fixed-rate loan, you can lower your interest costs by paying down the principal faster because interest is calculated against the principal balance. Even small additional principal payments can help.
What happens if I pay an extra $100 a month on my mortgage principal?
The number of months of payments can be shortened by adding just $100 more to the principal each month. A 30 year mortgage (360 months) can be shortened to roughly 24 years (279 months), which equals a 6 year savings!
Is it better to pay extra on principal monthly or yearly?
A yearly increase in your mortgage payment may significantly shorten the length of your loan. Paying an additional 1/12 each month is the most cost-effective way to do this. You will have made the equivalent of an additional payment by the end of the year, for instance, if you pay $975 per month on a $900 mortgage payment.
What happens if I pay 2 extra mortgage payments a year?
By increasing your principal payments, you can reduce the term of your mortgage and accelerate the process of equity growth. You’ll make fewer total payments because your balance is being paid off more quickly, which will result in more savings.