The Benefits of Overpaying a Mortgage

A home mortgage is typically the largest debt ever faced by a consumer.

Many borrowers simply pay the minimum each month for their mortgage payment and do not reap the rewards of pre-paying their mortgage payment. The ways in which a borrower can pre-pay a mortgage vary, but the end result is typically the same. For example, on a 30 year fixed mortgage, if a borrower makes one extra monthly payment on his mortgage each year of the debt, he reduces the term of the mortgage by a full 7 years.

No late fees

If a borrower makes one extra payment during the life of the loan and applies it to future payments, he can avoid incurring any late fees because he will always be one month ahead on his mortgage payment. This can also come in handy if the borrower is going on an extended vacation and will be unable to pay his mortgage on time. He can simply pay it a month or two in advance and avoid any penalties while on vacation.

Reduced Term

As stated early, paying one extra payment per year can reduce the term of a mortgage by several years. Additionally, a borrower can reduce the term even more with additional payments. For example, two extra monthly payments made each year on a 30 year fixed mortgage cut the length of the loan almost in half. This can be broken up into smaller additional payments each month, or in large lump sum payment once a year. Regardless of the method, the end result is the same.

Reduced Interest

The interest saved over the life of a loan can be dramatic when extra payments are applied to the debt. For instance, if the borrower has a $100,000, 30 year mortgage with a 5 percent interest rate, he can save $17,178.29 over the life of the mortgage by simply making one extra payment per year. This number increases with the increase in the size of the debt.

References

• Kiplinger: Extra Mortgage Payments Can Pay Off
• Financial Web: All About Prepayment