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Editor’s Note: This story was originally Penny Horder.
Thirty years is a long time. Continuing to pay your mortgage each month can feel even longer.
But what if you could eliminate that financial ball and chain by paying off your mortgage early?
In fact, if you can scrape together the equivalent of one extra mortgage payment each year, you can pay off the loan for an average of four to six years.
It can also save tens of thousands of dollars in interest payments.
Free up money in your budget by paying off your mortgage faster and eliminating outstanding loan balances. That means you can direct your money towards other goals.
We break down exactly how it works, how much you can save, and the strategies you can use to squeeze extra mortgage payments out of your budget.
Mortgage payment method
Most people cannot afford to buy a home with cash right away. Instead, you will pay a percentage of the total cost. down payment, take out the remaining loan. That’s the mortgage, which he usually pays off over 15 to 30 years.
Principal and interest are the main components of a mortgage payment. Principal is the original amount you borrowed, and interest is what the mortgage lender charges to lend you money.
Regular monthly payments may also include Private Mortgage Insurance (PMI). This is free once you pay 20% of the principal.
Initially, the loan balance is so large that most of your monthly mortgage payments will be interest. Only a small amount is used to repay the principal of the loan.
Paying back the principal means less interest each month as the loan balance is reduced.
Additional Mortgage Payment Methods
As you make extra mortgage payments and apply them to the principal, the principal balance is gradually reduced, ultimately saving you money and paying less interest over the life of the loan.
Also, if you owe less interest, you can shorten the term of your mortgage by years.
Additional principal payments also help build home equity and eliminate PMI faster.
The cost of PMI on traditional mortgages averages between 0.58% and 1.86% of the original loan amount for the year.
If you pay a 5% down payment for a 30-year loan term of $350,000, you’ll be paying $161 to $515 a month on PMI alone. The sooner you pay back 20% of the principal, the sooner you can eliminate this additional monthly expense.
Save thousands of dollars with one extra payment
Want to know how extra payments can save you money and help you pay off your mortgage early?
For example, a $350,000 home has a 30-year fixed rate mortgage at 6% interest. Regular monthly fee is $2,098.
- Payment date: December 2052
- Total interest expense: $405,434
- Total Loan Cost: $755,434
Do you see how the gross interest ends up being higher than the purchase price of the house?
How Additional Monthly Payments Add Up
Adding a monthly payment of $2,098 each December will pay off your 30-year mortgage five years ahead of schedule and save you a net interest of about $82,730 in the process.
- Payment date: September 2047
- Total interest expense: $322,703
- Total Loan Cost: $672,703
You read that right: interest savings of $82,730.
adjust and save
But we know it’s hard to make $2,098 during the holiday season.
Instead, let’s say you increase your mortgage payment by 1/12th ($175) each month. At the same 6% interest rate, you would pay $2,273 instead of $2,098.
The result is about the same, but you’ll save interest if you make an additional mortgage payment at the end of the year.
- Payment date: July 2047
- Total interest expense: $319,441
- Total Loan Cost: $669,441
As you can see, those extra monthly payments pay off. To figure out your own potential savings, Amortization Schedule Calculator.
3 Ways to Make Extra Mortgage Payments
There are several ways to make additional mortgage payments within a year.
Whichever method you choose, it’s important to tell the loan provider that you’re applying the additional payment to your principal balance. If you don’t, your extra payments could go toward interest and not pay off your mortgage faster.
1. Lump sum payment
Save money throughout the year and put it into a special savings account. Empty your account at the end of the year and make your 13th monthly payment.
You can put extra money into your account from tax refunds, bonuses at work, or other unexpected income to build your account faster.
Another option is to set up automatic monthly fixed deposits from your checking account to your savings account. That way, you don’t have to rush to figure out your bonus mortgage payments when December approaches.
2. Add an extra dollar to your monthly payment
Divide your monthly mortgage payment by 12 and add that amount to your monthly payment.
That extra amount will automatically be applied to the principal loan balance, but check with your mortgage company to be sure.
It may be easier to pay a little more than your monthly minimum payment rather than a lump sum payment. It can also help you pay off your mortgage early.
3. bi-weekly payments
Some mortgage servicers let you sign up for bi-weekly mortgage payments. This allows him to pay half the mortgage bill every two weeks instead of once a month.
Doing so will result in 26 half payments or 13 monthly full payments each calendar year.
These extra payments on your mortgage can save you big bucks in the long run.
Note that some lenders may charge an additional fee if you choose bi-weekly payments, while others may not offer this service at all.
Before Initiating Additional Payments
Before you start making additional mortgage payments, talk to your loan company.
Some lenders charge a prepayment penalty if you pay off your mortgage early.
If your mortgage includes this clause, you can still pay off the loan early, but you’ll need to save extra money to offset the penalty amount for the upfront payment.
It’s important to make sure the extra payment applies to the mortgage principal as well. Most companies offer this option online, but we recommend calling to make sure your extra cash is being sent to the right place.
Finally, make sure you are in good financial standing. You should look at your overall financial situation and decide if your money is better spent elsewhere.
Is getting out of debt completely your top financial priority, or are there other ways your money could be working for you?
Other financial considerations
If your mortgage interest rate is low, you might want to put extra money into your company’s 401(k) plan, save for your kids’ college tuition, or pay off other high-interest debt like credit cards or student loans. It may be wise to
You should also keep health emergency fundwith enough money left over to cover monthly expenses.
As long as you’re not neglecting your other financial goals and your budget allows, making additional payments each year is a smart way to pay off your mortgage early.
You may not see the fruits of your labor right away, but your hard work is worth it when you own your home in less than free and definite years.