Connect with us

Hi, what are you looking for?

Loan And Finance

How 1 Extra Mortgage Payment a Year Helps Pay Off Your Home Faster

extra mortgage payment final



extra mortgage payment final

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, if you can scrape together the equivalent of one extra payment to put toward your mortgage each year, you’ll take — on average — four to six years off your loan.

You’ll also save tens of thousands of dollars in interest payments.

Paying off your mortgage faster and eliminating that outstanding loan balance can free up money in your budget — money you can put toward other goals.

We’ll break down exactly how it works, how much you can save and strategies you can use to squeeze an extra mortgage payment out of your budget.

How Paying on a Mortgage Works

Most people can’t afford to buy a house outright in cash. Instead, you pay a percentage of the total cost, known as a down payment, and take out a loan for the rest. That’s your mortgage, and it’s typically paid back over 15 to 30 years.

Principal and interest are the main components of your mortgage payment. The principal is the original amount you borrowed and interest is what mortgage lenders charge for lending you the money.

Advertisement. Scroll to continue reading.

Your regular monthly payment may also include private mortgage insurance (PMI), a fee that goes away once you’ve paid off 20% of the principal.

In the beginning, most of your monthly mortgage payment goes to interest because your loan balance is so high. Only a little goes toward paying off the loan principal.

Paying down the principal means you owe less interest each month because your loan balance shrinks.

Making extra mortgage payments — and applying them to the principal — reduces your principal balance little-by-little, so you end up saving money and owing less interest over the life of the loan.

And when you owe less interest, you can trim years off your mortgage term.

Additional principal payments also build home equity and help eliminate PMI faster.

The cost of PMI for a conventional home loan averages 0.58% to 1.86% of the original loan amount per year.

If you put a 5% down payment on a $350,000 30-year loan term, you could be paying $161 to $515 a month for PMI alone. The sooner you can get 20% of your principal paid off, the sooner you can eliminate this additional monthly cost.

Making 1 Extra Payment Can Save You Thousands of Dollars

Curious how an additional payment can help you save money and pay off your mortgage early?

Advertisement. Scroll to continue reading.

Consider this.

Let’s say you have a 30-year fixed-rate mortgage on a $350,000 home with a 5% interest rate. Your regular monthly payment is $1,879.

  • Pay-off date: August 2052
  • Total interest paid: $326,395
  • Total cost of the loan: $676,395

See how the total interest nearly adds up to the entire purchase price of the house? Ouch.

If you make an extra monthly payment of $1,879 each December, you’ll pay off your 30-year mortgage almost five years ahead of schedule and net about $60,000 in interest savings in the process.

  • Pay off date: November 2047
  • Total interest paid: $266,033
  • Total cost of the loan: $616,033

You read that right: $60,000 in interest savings.

But we realize that coughing up $1,800 around the holidays can be tough.

So instead let’s imagine you increased your mortgage payment by 1/12th ($157) each month. With the same 5% interest rate, you’d end up paying $2,036 instead of $1,879.

The results are nearly identical, although making an extra mortgage payment at the end of the year saves you a tiny bit more money on interest.

  • Pay off date: December 2047
  • Total interest paid: $266,881
  • Total cost of the loan: $616,881

As you can see, those extra monthly payments really 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.

No matter which method you choose, it’s important to tell your loan provider that you want the extra payment applied to your principal balance. Otherwise, extra payments might go toward the interest — which doesn’t help you pay off your mortgage faster.

1. Single Lump-Sum Payment

Save up money throughout the year and put it in a special savings account. At the end of the year, empty the account to make your 13th monthly payment.

Advertisement. Scroll to continue reading.

You can put extra money from tax refunds, bonuses at work or other unexpected income into the account to build it up faster.

Another option is setting up automatic recurring monthly deposits from your checking account to the savings account each month. This way, you’re not scrambling to come up with your bonus mortgage payment when December rolls around.

2. Add Extra Dollars to Each Monthly Payment

Divide your monthly mortgage payment by 12 and add that amount to each month’s payment.

That extra amount should automatically get applied to your principal loan balance, but verify with your mortgage company just in case.

Paying a little above the minimum payment each month is easier for some people than making a lump-sum payment.

3. Biweekly Payments

Some mortgage servicers let you sign up for biweekly mortgage payments. This lets you pay half your mortgage bill every two weeks instead of once a month.

Doing so results in 26 half-payments — or 13 full monthly payments — each calendar year.

Those additional payments toward your mortgage can save you major money in the long run.

Be aware that some lenders may charge extra fees if you opt for biweekly payments, while others may not offer this service at all.

Advertisement. Scroll to continue reading.

Before You Start Making Extra Payments

Before you start making extra mortgage payments, talk to your loan company.

Some lenders charge prepayment penalties if you pay your mortgage off ahead of schedule.

If your mortgage includes this clause, you can still repay your loan early, but you’ll need to save up extra money to offset the prepayment penalty amount.

It’s crucial to make sure any extra payments apply to your mortgage principal, too. Most companies give you this option online but you may want to call them to confirm that your extra cash is going to the right place.

Finally, make sure your finances are in good shape. You’ll need to examine your entire financial picture and determine if your dollars are better spent elsewhere.

Is being completely debt-free your top financial priority, or could your money be working for you in other ways?

If the interest rate on your mortgage is low, it might be wiser to put extra money in your company’s 401(k) plan, save for a child’s college tuition or pay off other debts with higher interest rates, like credit cards and student loans.

You also need to maintain a healthy emergency fund, with enough money left over to cover your monthly expenses.

As long as you’re not neglecting other financial goals and your budget can afford it, making an extra payment each year is a smart way to pay off your mortgage sooner.

Advertisement. Scroll to continue reading.

You won’t see the fruits of your labor right away, but your hard work will be worth it when you own your home free and clear years ahead of schedule.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.




.



Source link

Click to comment

Leave a Reply

Latest

California

More details have emerged in the case of a California dermatologist who allegedly poisoned her husband by surreptitiously pouring Drano into his lemonade.  Jack...

Washington

Placeholder while article actions load SEOUL — As rainwater gushed into Yoon Jin-hyeok’s semi-underground apartment on Monday, the night of South Korea’s historic downpour,...

Georgia

OXFORD, Ga. — Walton County sheriff’s detectives on Monday were continuing to investigate a case in which two Oxford residents were charged with engaging...

Online Business Success

A representational image of the International Monetary Fund (IMF) logo. — Reuters/File The letter is now to be jointly signed by finance minister and...

Loan And Finance

From left, Firefighters Sergio Porras, Jerome Alton and Natasha Rodocker mop up hot spots while battling the Oak Fire in the Jerseydale community of Mariposa County,...

Social Media

Google’s looking to add more context to its Search results, in order to mitigate the spread of misinformation, by adding improved contextual data matching...

Advertisement

You May Also Like

Uncategorized

Introductions get a lot of attention. I’ve explored the topic of how to write them even though as a reader, I always skip them....

Online Business Success

The internet is now our nervous system. We are constantly streaming and buying and watching and liking, our brains locked into the global information...

SEO Guide

There are all kinds of pictures of the world on the internet, but to find one of these specific pictures that you want to...

Online Business Success

You can think of link building in many ways. I like to call it tedious, painful, and a test of patience. It’s also necessary...

Advertisement