There are a few factors to consider when deciding whether or not to make extra mortgage payments. One key point to consider is the length of time you plan to live in the home. If you only plan to stay in the home for a few more years, it may not make sense to make extra payments as you will not have enough time to see the full benefit of the shorter loan term. Additionally, it’s important to consider your financial situation and how you manage your discretionary funds.
Making extra mortgage payments can save on interest costs and shorten the length of your mortgage, but it’s important to make sure you have the financial flexibility to do so. It’s also worth noting that making extra mortgage payments does not lower your monthly payment, but it does shorten the loan term and stop payments sooner. If you have an extra mortgage payment plan that will allow you to enjoy a few years of mortgage-free living, it may be worth considering.
So What Is The Effect Of Paying Extra Principal On A Mortgage?
1. Save On Interest
Extra mortgage payments can be a good idea for some homeowners, but not for everyone. By making additional payments toward the principal of your mortgage, you can save on interest costs and shorten the length of your mortgage, allowing you to own your home outright faster. However, it’s important to consider whether making extra payments is the most effective use of your discretionary funds.
If you only plan to live in your home for a few more years, it may not make sense to pay extra on your mortgage, as you won’t see the full benefits of the extra payments. Additionally, if you have a variable rate mortgage, paying extra each month or refinancing while rates are low can be a good strategy to save on interest costs. Making extra payments on your mortgage can also help increase your equity in the home and improve your chances of refinancing out of a variable rate loan.
2. Shorten The Loan Term
By making extra principal payments on your mortgage, you can shorten the length of your loan and save on interest costs. For example, if you have a mortgage of $500,000 at an interest rate of 6% and a 30-year loan term, paying an additional $150 towards the principal each month could save you approximately $81,426 and allow you to pay off your mortgage 3.5 years earlier. This is because paying down the principal faster reduces the overall balance and interest charged on it, leading to fewer total payments and more savings in the long run.
3. Other Benefits
There are several benefits to making extra mortgage payments. One of the main benefits is that it can save you money in the long run by reducing the amount of interest you have to pay on the loan. This is because your interest is calculated based on your remaining loan balance, so by paying more principal every month, you are effectively lowering the balance and reducing the amount of interest charged on it.
Another benefit of making extra mortgage payments is that it can help you to pay off your loan faster, potentially allowing you to become mortgage-free sooner. This can be especially beneficial if you are planning to stay in your home for a long time and want to pay off the mortgage as quickly as possible.
Additionally, if you have a variable rate mortgage (ARM), making extra payments can be a good way to save on interest before your loan resets at a predetermined point. This can also increase your chances of refinancing out of a variable rate loan as the equity in your home increases.
Overall, whether or not it makes sense to make extra mortgage payments will depend on your financial situation and how you manage your discretionary funds. If you have the extra money available and are comfortable with the idea of paying more each month, it can be a great way to save money and pay off your loan faster. However, it’s important to carefully consider your options and make sure that making extra payments is the right choice for you.
How To Pay Off A Mortgage Faster?
If you want to pay off your mortgage faster, you can consider making additional principal payments. This will reduce the length of your mortgage term, allow you to build equity faster, and result in fewer total payments. Here are some tips to consider:
Make More Frequent Payments
Making additional principal payments on your mortgage can help you save on interest costs and shorten the length of your mortgage. By paying more principal each month, you can decrease your principal balance and the amount of interest charged on it. This can be done through one extra mortgage payment a year, two extra payments a year, or an extra payment every few months.
The frequency of these payments can help you eliminate several years from your mortgage term. It’s worth noting that there is no specific best day of the month to pay your mortgage, as both the principal and interest amounts decrease over time regardless of the payment date.
Consider A Lump Sum Payment
If you have received a large sum of money from a commission, inheritance, or other source, it may be wise to consider using those funds to make additional principal payments on your mortgage. This can help you pay off your loan faster and save on interest costs over the life of the mortgage. Keep in mind that every little bit helps, so even small additional payments can make a difference in the long run.
Round Up Your Payments
One way to potentially pay off your mortgage more quickly is to round up your payments to the next highest multiple of $100. For example, instead of paying $1,450, you could pay $1,500, and instead of paying $1,125, you could pay $1,200. This strategy may be feasible depending on your budget and can help you become a homeowner faster without straining your finances.
Four Alternatives To Paying Extra Mortgage Principal
When deciding whether to make extra payments on your mortgage, it’s important to consider your overall financial goals and current financial situation. Some alternatives to making extra mortgage payments include:
- Paying off credit card debt: If you have high-interest credit card debt, it may make more sense to focus on paying that off before making extra mortgage payments. Credit card interest rates are typically much higher than mortgage rates.
- Refinancing to a lower rate: Refinancing your mortgage to a lower rate can save you money in the long run, even if you don’t make extra payments. You can also consider refinancing from a 30-year mortgage to a 15-year mortgage, which will save you money over the course of the loan even if you don’t make extra payments.
- Building up a rainy day fund: It’s important to have an emergency savings fund in case of unexpected expenses or job loss. Consider setting aside three to six months’ worth of living expenses in savings before making extra mortgage payments.
- Investing in the market: If you don’t plan to stay in your home for a long time, it may make more sense to invest the money you would have put toward extra mortgage payments. In a low-interest rate economy, mortgage rates are often lower than what you could earn from a moderate risk investment portfolio.