What Happens if I Paid an Extra Mortgage Payment?
Many homeowners like the idea of paying off their mortgage as quickly as possible. One easy way to do this is by making an extra mortgage payment either incrementally each month or by making the equivalent of one or two extra monthly payments each year. By putting additional funds toward the mortgage, you can reduce the amount of interest paid over the life of the loan while reducing the length of the loan.
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Savings
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Interest is calculated on the principal balance of the loan. If you pay down the principal of your loan, interest is compounded on a smaller dollar amount, so you'll pay less interest over the life of the loan. Over the repayment period of the loan, this can be significant. Paying an additional $100 per month on a $100,000 loan amortized over 30 years at five percent interest can save you over $30,000. This will also shorten the life of the loan considerably. Depending on the terms of your loan, you can reduce its repayment period by several years just by making nominal extra payments.
Build Equity Faster
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Making extra mortgage payments helps you build equity, or the portion of your home's value that you actually own. You'll pay down the principal faster, thus owning your home faster. Options vary based on loan amount, interest rate, extra amount paid and the timing of the additional payments.
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Money Management
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Paying an extra mortgage payment can help with money management by allowing you to control the repayment period of your loan. With a shortened amortization period, your money is available sooner for other things. You can better plan for future large financial obligations like college tuition or a home remodeling project.
Financial Stability
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For most homeowners, their mortgage payment is generally their highest monthly payment with the longest term. Finding yourself temporarily unemployed or disabled could put your home at risk if you still owe a substantial amount. Paying off your home early will make you more secure.
Considerations
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Paying off your mortgage early can provide peace of mind and financial freedom. However, if you have other financial obligations, it may make more sense to address those first. According to an article in the "New York Times," you should pay off higher-interest debt, such as credit cards, before you make additional mortgage payments. Your lender may assess a fee for paying your mortgage off before the end of its term, though that generally applies when the loan is paid off during the first few years. Research your options before making an extra payment to ensure that you're gaining the best possible financial advantage.
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References
- Photo Credit new home 3 image by Kathy Burns from Fotolia.com
