Homeownership is a significant financial undertaking, and the mortgage payment is often the largest monthly expense. While it is tempting to minimize mortgage payments, making one extra payment per year can provide substantial long-term benefits. This article explores the advantages of making an additional mortgage payment, citing reputable sources such as Movement Mortgage, Bankrate, and APM Mortgage.
Key Facts
- Saves money on interest: Making an additional payment towards your mortgage allows you to apply it towards the loan’s principal. This gradually reduces the loan balance and can ultimately reduce the amount of interest you pay over time. By decreasing the loan balance, the amount of interest added to each payment also decreases, resulting in potential savings of thousands of dollars in interest over time.
- Builds equity faster: Making extra mortgage payments helps to speed up the building of home equity. As you reduce your loan balance, your equity in the home increases, provided that the home’s value remains the same or increases over time. Having equity in your home increases its value and can potentially allow you to take out home improvement loans. Additionally, reaching 20% equity in your home sooner can help you eliminate private mortgage insurance (PMI) and save even more each month.
- Allows you to own your home faster: Just one extra payment per year can significantly impact the length of your loan, potentially reducing the term by years. This means you can be free of mortgage payments much sooner than expected, giving you the freedom to allocate those funds towards other financial goals or expenses.
It’s important to note that before deciding to make extra mortgage payments, you should consider your overall financial situation. If you have other high-interest debts, it may be wiser to pay them off first. Additionally, having an emergency fund is recommended to provide financial protection in case of unexpected emergencies or job loss.
Benefits of Making an Extra Mortgage Payment
Savings on Interest
When you make an extra mortgage payment, you can specify that it be applied towards the principal balance. This gradually reduces the loan balance, which in turn reduces the amount of interest you pay over time (Movement Mortgage, 2023). As the loan balance decreases, the amount of interest added to each payment also decreases. Over time, this can result in significant savings, potentially amounting to thousands of dollars in reduced interest payments (Bankrate, 2022).
Building Equity Faster
As you reduce your loan balance through extra payments, your equity in the home increases (APM Mortgage, 2017). Equity represents the portion of the home that you own outright. Having equity built up in your home increases its value and provides you with more financial flexibility. For example, you may be able to qualify for home improvement loans or eliminate private mortgage insurance (PMI) once you reach a certain equity threshold (Movement Mortgage, 2023).
Accelerated Homeownership
Making one extra mortgage payment per year can significantly shorten the term of your loan, potentially by several years (APM Mortgage, 2017). This means you will be free of mortgage payments sooner than expected. The extra funds you were allocating towards your mortgage can then be directed towards other financial goals, such as retirement savings, investments, or travel.
Considerations Before Making Extra Payments
While making extra mortgage payments offers numerous benefits, it is important to consider your overall financial situation before doing so. If you have high-interest debts, such as credit card balances or student loans, it may be more prudent to prioritize paying those off first. Additionally, it is recommended to have an emergency fund in place before making extra mortgage payments (Movement Mortgage, 2023).
Conclusion
Making one extra mortgage payment per year can provide substantial financial benefits, including savings on interest, accelerated home equity building, and a shorter loan term. However, it is important to assess your financial situation carefully and ensure that you are financially prepared before making this commitment. By weighing the benefits and considerations outlined in this article, you can make an informed decision that aligns with your long-term financial goals.
Sources
- Movement Mortgage. (2023, June 7). Save big with just one extra mortgage payment every year. https://movement.com/blog/2023/06/save-big-just-one-extra-mortgage-payment-every-year
- Bankrate. (2022, February 11). Is Prepaying Your Mortgage A Good Decision? https://www.bankrate.com/mortgages/prepaying-your-mortgage/
- APM Mortgage. (2017, December 1). How Much One Extra Mortgage Payment Can Save You. https://www.apmortgage.com/blog/how-making-one-extra-mortgage-payment-a-year-can-benefit-you
FAQs
How much money can I save by making one extra mortgage payment per year?
The amount you save will vary depending on the terms of your mortgage, but it can be substantial. For example, if you have a $200,000 mortgage with a 4% interest rate and a 30-year term, making one extra payment per year could save you over $10,000 in interest and shorten your loan term by over 3 years.
How do I make an extra mortgage payment?
You can make an extra mortgage payment by simply sending in a check or money order for the amount of your regular monthly payment. Be sure to specify that the extra payment should be applied to the principal balance of your loan. You can also set up automatic extra payments through your mortgage servicer.
Are there any fees for making extra mortgage payments?
Most lenders do not charge fees for making extra mortgage payments. However, it is always a good idea to check with your lender to be sure.
Can I make more than one extra mortgage payment per year?
Yes, you can make as many extra mortgage payments as you want. However, keep in mind that making too many extra payments could affect your tax deductions.
What are the benefits of making extra mortgage payments?
Making extra mortgage payments can save you money on interest, build equity faster, and shorten the term of your loan.
Are there any drawbacks to making extra mortgage payments?
The main drawback to making extra mortgage payments is that it can reduce your cash flow. However, if you can afford to make extra payments, the benefits far outweigh the drawbacks.
Should I make extra mortgage payments if I have other debts?
It depends on your financial situation. If you have high-interest debts, such as credit card balances or student loans, it may be better to prioritize paying those off first. However, if you have low-interest debts or have already paid off your other debts, making extra mortgage payments can be a great way to save money and build equity.
How can I decide if making extra mortgage payments is right for me?
The best way to decide if making extra mortgage payments is right for you is to talk to a financial advisor. They can help you assess your financial situation and determine if making extra mortgage payments is a good option for you.