You finally own that home you always wanted and are benefiting from the financial perks, but with a new home comes monthly mortgage payments. You’re doing great learning to budget monthly expenses and keeping up with those payments on your largest investment - it’s not always easy to do!
So why in the world would you want to spend more money to pay an extra mortgage payment every year? How much does 1 extra mortgage payment save anyway? We’ve got 3 reasons why you might decide to do just that, depending on your financial goals.
Reasons to Make an Extra Mortgage Payment
Reason #1: Save Interest Dollars
By paying extra money toward your mortgage payments, an increasing amount goes toward your principal loan balance, gradually reducing it. This lowers the amount of interest added to the mortgage loan each month. These savings will not be realized until loan payoff time, but when that time arrives, you may have saved tens of thousands of dollars in interest.
Reason #2: Build Equity Quicker
As you reduce your loan principal, your equity increases, assuming home values are maintained. Having equity built up in your home increases the value of your investment and means that you may have increased profits if you decide to sell. Equity also provides an option for future home improvement loans, if needed. If you have less than 20% equity and are paying PMI, you have an additional reason to make extra payments to achieve 20% equity and get rid of that extra monthly obligation.
Reason #3: Pay Off Your Home Early
By making that extra payment every year, you might pay off your home 3-4 years early (earlier if you decide to apply more than one extra payment a year). Not only does that save interest dollars, but it also means that you will be at a point of having no monthly payment obligations that much sooner and can use those dollars for other expenses like college tuition for children, vacations and travel, or a second home. If your goal is to become debt-free, those extra payments will get you there sooner.
How to Make an Extra Mortgage Payment
There are multiple methods of making extra mortgage payments - here are 3 that might work for you:
One Lump Sum Payment - save up money throughout the year to equal one extra mortgage payment and send it in at any point during the year, specifying that it is a principal-only payment.
Extra Dollars in Monthly Payment - Divide your monthly mortgage payment by 12 and add that amount to each monthly payment. That extra amount will be applied to your principal loan balance.
Bi-Weekly Payments - Divide your monthly payment in half and pay that amount every other week. By the end of the year, you will have paid an extra mortgage payment.
Before you decide that you're going to start making extra mortgage payments each year, make sure that you are financially healthy. It’s a good idea to apply extra dollars to paying off high-interest debt and to investing in 401k’s, etc. before applying those dollars to your mortgage. Depending on what your financial goals are, you may determine that making those extra payments is the right move for you. It may take some time before you see the full benefits of your diligence, but when you reach your goals sooner, it could be worth it.
If you are considering refinancing in order to reduce your loan term or interest rate and experience some of these savings sooner, reach out today - our team is here to answer your questions! Haven’t started your homeownership journey yet? We can help with that, too.