Should you make an extra mortgage payment?
If you are a homeowner wondering how to responsibly spend a holiday bonus or upcoming tax return, consider paying it into your home. When your budget allows, making an extra payment toward your mortgage can be beneficial. You can reduce interest costs and lower your overall debt. Making extra payments is not the right move for every financial situation, so consult a mortgage professional or financial advisor before making a decision.
The greatest cost all homeowners who purchase a home with mortgage financing incur is mortgage interest. Mortgage interest is also one of life’s biggest financial obstructions. Although mortgage loans typically have lower interest rates than other types of debt, like auto loans or credit cards, they have higher balances which translates into higher interest costs. For example, if you purchased your home with a $200,000 30-year fixed-rate loan at 4.1%, over the life of the loan you will pay approximately $147,000 in mortgage interest.
There are two ways to make extra payments toward your mortgage; you can increase your monthly payments or pay a lump sum. Before you start making any extra payments, confirm with your mortgage lender that there are no prepayment penalties and find out if making extra payments is right for you. Increasing your monthly payment will chip away at your mortgage debt faster. Referring to the scenario above, if you start paying an additional $100 each month, you could save $27,000 in mortgage interest and pay off your home in 25 years instead of 30. You can also invest a lump sum into your mortgage when you receive a holiday bonus, inheritance, or tax return. Some homeowners budget an annual extra payment, by making 13 mortgage payments instead of the required 12. Remember to discuss your intentions with your lender ahead of time to set a plan that works best for you.
Making extra mortgage payments can help you pay off your mortgage faster and build more home equity, but it’s not the right option for everyone. If you have higher interest debt, like credit card debt or student loans, allocating any extra cash you have toward paying down that debt could save you more over time. If you can afford to put extra money toward your monthly mortgage payment, consider refinancing into a 15-year fixed-rate loan instead. Shorter term loans will have higher monthly payments, but typically carry lower interest rates than longer term loans. When you refinance your mortgage, you are originating a new loan, so be prepared to pay closing costs and lender fees. If you’d like to estimate your savings check our Short vs. Long Term Mortgage Calculator.
Making extra mortgage payments is a great way to pay off your mortgage sooner and build home equity faster. If you have any questions about making extra mortgage payments or refinancing your loan, contact your loan officer.
Sources: The Balance