Making extra payments on your mortgage may be a great way to save money in the long run and pay off your mortgage faster. By making more than just the minimum monthly payment on your mortgage, you can reduce the principal balance, which can lead to early payoff and reducing the amount in interest charges you pay over the life of the loan.
Potential benefits of making extra mortgage payments
While it may require some additional effort and sacrifice in the short term, paying extra on your mortgage may have numerous financial benefits in the long run.
- Interest savings: One of the most significant benefits of making extra mortgage payments is the potential for substantial interest savings. By reducing the principal balance on your loan faster, you pay less in interest over the life of the mortgage. This may amount to tens of thousands of dollars in savings, depending on the loan amount and interest rate.
- Early loan payoff: Making extra mortgage payments may allow you to pay off your loan early. This means you become mortgage-free sooner and save on years of mortgage payments. Owning your home outright may provide a sense of financial security and freedom, giving you the opportunity to allocate those funds towards other goals, such as paying down debts, saving for retirement, or investing.
- Equity buildup: Extra payments towards the principal balance of your mortgage help you build equity in your home at a faster rate. Equity is the difference between the current value of your home and your outstanding mortgage balance. By reducing the principal balance, you not only decrease the interest expense but also increase your ownership stake in the property.
- Improved creditworthiness: Consistently making extra mortgage payments may reflect positively on your creditworthiness. This may help improve your credit score over time and lead to better interest rate offers on future loans and credit applications.
- Financial flexibility: Paying off your mortgage early provides you with greater financial flexibility. Without a monthly mortgage payment to worry about, you have more disposable income to allocate towards other financial goals. This increased flexibility may make you feel like you’ve enhanced your overall financial well-being.
- Possibility of selling your home: If you plan to sell your home in the future, making extra mortgage payments may put you in a stronger position to when searching for a new home. By reducing your outstanding mortgage balance and building up your equity, you will potentially have more funds to contribute towards a down payment on a new property. This may even help you to afford a more expensive home.
- Peace of mind: Finally, making extra mortgage payments may provide you with a sense of security and peace of mind. Being debt-free or having significantly reduced your mortgage balance may alleviate financial stress and provide a greater sense of control over your finances. This peace of mind may allow you to focus on other life goals and priorities with a reduced financial burden.
What to consider before paying extra on your mortgage
While the idea of paying off your mortgage early may be tempting, there are a few factors to consider before making extra payments:
- Financial stability: You may want to ensure that you have a stable financial situation with enough emergency savings and no high-interest debts. Prioritize your financial needs and obligations before allocating additional funds towards your mortgage.
- Interest rate: Compare the interest rate on your mortgage with the potential return you could earn by investing the funds elsewhere. If your mortgage interest rate is low, you may consider investing your money instead to potentially yield higher returns in the future. Consult with a trusted financial advisor if you think this is a strategy worth considering in your situation.
- Prepayment penalties: Review your mortgage agreement to determine if there are any penalties for making extra payments. In some cases, lenders may charge fees for early repayment, which could reduce your potential savings.
If you’re in a position to comfortably make extra mortgage payments, consider the potential interest savings by contributing even just the equivalent of a small fraction of your minimum monthly payment as additional funds towards the principal balance.
For example, if you have a $250,000 mortgage with a 30-year term and an 8.5% interest rate, your monthly payment would be $1,922.28. Without extra payments, your total mortgage payments on principal and interest over 30 years would equal $692,022.14.
By paying an additional $100.00 every month, you could pay off your mortgage about 5 years sooner, and the final amount paid would be $597,297.02. That’s a savings on interest of almost $94,725!
Keep in mind that this savings strategy doesn’t only work for purchase mortgages — you can apply the same action to second mortgages such as home equity loans and see similar results.
When is it a good idea to make extra mortgage payments?
Making extra mortgage payments may be a good idea under the following circ*mstances:
- Long-term savings: As you can see from the loan payment example above, by paying off your mortgage early, you can save a substantial amount over the life of the loan. The earlier you start making additional payments, the more you can save on interest charges.
- Reduced financial burden: Paying off your mortgage early means owning your home outright and eliminating a large monthly expense. This may provide financial security and flexibility for other goals such as retirement planning or saving for education.
- Emotional satisfaction: Paying off your mortgage ahead of schedule may bring a sense of achievement and peace of mind. It may give you the satisfaction of feeling debt-free and allow you to have more freedom in how you decide to plan your monthly budget.
Steps to make extra mortgage payments
- Check with your lender: Start by reaching out to your mortgage lender to understand their policies on making extra payments. Some lenders allow you to make additional payments without any penalties, while others may have certain restrictions or fees.
- Decide on the amount: Determine how much extra you can comfortably afford to pay towards your mortgage each month. Even a small additional amount may lead to a significant impact over time.
- Specify the purpose: Clearly communicate to your lender that the extra payment is meant to be applied to the principal balances. This will ensure that the additional amount is reducing the loan amount rather than being put towards future interest payments.
- Choose a repayment strategy: Consider employing a common strategy such as the biweekly payment plan or the additional lump sum payment. The biweekly payment plan involves making half of your monthly payment every two weeks, resulting in an extra payment each year. With the additional lump sum payment, you make a one-time payment towards your principal balance.
- Automate your payments: Set up automatic payments so that the extra amount is conveniently deducted from your checking account each month, without any chances of forgetting or delaying.
Closing thoughts: Should you pay extra on your mortgage?
Making extra mortgage payments can unlock various financial benefits including interest savings, early loan payoff, improved creditworthiness, building equity faster, and increased financial flexibility. It’s important to consider your personal financial situation carefully and decide on your long-term goals before settling on your strategy to pay extra on your mortgage. You may find it easier to contribute a small additional amount monthly, make lump sum payments throughout the year, or possibly dedicate additional money you could put towards your mortgage for other debt payments instead. If you have the means to expedite your mortgage payoff, the benefits to doing it could potentially be substantial.
