Why Should You Make an Extra Mortgage Payment?
10 min read
Some people choose a 30-year mortgage for the lower payment, yet hate the idea of paying the loan over three decades! And the idea of a 15-year mortgage doesn’t sound much better.
Sound familiar? If so, you’re not alone.
But, what if you could keep a 30-year term and pay it off early? Would you jump at the opportunity?
Reaching the finish line is easier than you think—and it all starts with an extra principal-only payment each year.
How do extra principal-only payments work?
Here’s a little backstory on the breakdown of a mortgage payment.
Basically, four main components make up your payment, these being principal, interest, taxes, and insurance. Each time you make a payment a portion goes into an escrow account to pay your taxes and homeowners insurance, and the other portion pays down the interest and principal.
This cycle continues until there’s a zero balance.
However, at anytime during your loan you can make an extra payment to chip away at the balance faster.
But it isn’t enough to make an extra payment. The payment must go entirely to reducing the principal, and not the interest. So you must specify this payment as “principal-only.” This is how you’ll shorten your loan term—and save a ton in interest.
And it only takes one extra principal-only payment a year to reduce a mortgage term by 5 to 7 years.
Here’s how to start this year.
1. Use bonus cash to pay down the mortgage
Clothes, electronics, and other splurges are common ways to spend free money. But if you’re serious about a mortgage-free life, put that cash toward your future and make an extra principal payment.
2. Pay half your mortgage payment every other week
Granted, most people don’t want to think about their mortgage more than once a month. But a biweekly schedule is by far one of the easiest ways to make an extra payment a year. Simply split the payment and pay half your mortgage every other week.
Stick with this schedule and you’ll make 26 biweekly payments, or 13 full monthly payments a year!
3. Pay extra toward your principal each month
An even better approach is to divide your mortgage payment by 12, and then add this amount to each monthly payment. It’s a simple change, yet you’ll make the equivalent of one extra payment a year.
4. Round up your mortgage payments
What if you don’t have a lot of money, yet you want to shave years off your mortgage. If you can’t make an extra payment a year, maybe you can round your payments to the nearest $100.
Apply the extra payment to principal only and watch your balance drop. This little trick might not take 5 to 7 years off your mortgage, but it’ll reduce it by 2 or 3 years.
Whether you’re buying or refinancing, the right mortgage can help you reach your goals. Contact us to start your journey today.