Effects of Making Extra Mortgage Payments

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Making extra mortgage payments can rapidly reduce your balance and cut the effective length of your loan.
Making extra mortgage payments can rapidly reduce your balance and cut the effective length of your loan. (Image: Jupiterimages/Pixland/Getty Images)

Most lenders set up mortgage payments to occur monthly. However, making extra payments on your mortgage to pay it down faster can reduce your balance more rapidly.

Per Month

Making an extra 1/12 payment per month -- one payment spread out over 12 months -- will reduce the effective length of your mortgage from 30 years to 21 years.

Per Year

Making one full extra payment per year will also reduce your mortgage balance substantially. Similarly, the added monthly payment will cause your 30-year mortgage to be reduced to 21 years.

Payment Specifications

When you make additional mortgage payments at any point, it is imperative that you specify that the payment is directed to reducing the balance on a mortgage, and should not be applied to interest or any applicable escrow payments. If this is not made clear, the payment will be applied directly toward the interest on your mortgage.

Bi-weekly Payments

Bi-weekly payment plans aren't always the best resource. Most lenders charge a fee to enroll in a bi-weekly payment plan and they will then escrow half of your payment and apply the payment to your mortgage in full at the specified due date on your account.

Benefits

Paying down a mortgage quickly builds equity and value in a property very quickly. This can allow for home equity loans to make major improvements on a property and increase the value of your real estate -- unless, of course, your home declines in value, which will eat into any equity you might build by making extra mortgage payments.

Misconceptions

Many homeowners believe that paying a mortgage prior to its maturation date can result in a prepayment penalty. Most lenders do not have a prepayment penalty for paying your mortgage off prior to it's maturation date, but check with your lender to discuss your own loan scenario.

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