Understanding the Benefits and Tricks to Making Extra Mortgage Payments

Making mortgage payments can start to feel like you’re trying to climb a mountain without the appropriate gear — that is, you’ll start feeling like reaching the top (or paying your loan off) is impossibly out of reach. There are some ways to chip away at the climb slowly, though. Making extra mortgage payments can be a strategic move for homeowners aiming to save on interest costs and shorten the life of the loan. Of course, there are tactics and caveats to understand in order to ensure your payments are being allocated the appropriate way.

 

The Benefit of Extra Mortgage Payments

Making one extra mortgage payment a year can significantly speed up paying off your home. By doing this, you can potentially shave several years off your loan term and save thousands of dollars in interest, since you can allocate your extra payments entirely to the principal, rather than the interest-laden monthly payments you’re making normally. Essentially, a 30-year mortgage could become a 25-year one!

To make it easier on your budget (since slapping down an additional entire mortgage payment all at once can be costly) consider breaking that extra payment into monthly portions — just add one-twelfth of your regular payment to each month. For instance, if your mortgage is $1,500 a month, instead of paying $3,000 one month just to squeak the extra payment in, you could tack $125 to every month (increasing the monthly payment to $1,625) to satisfy the one extra mortgage payment per year plan. This way, you’re gradually reducing your principal without a noticeable impact on your finances.

 

Extra Mortgage Payments vs. Investing

Deciding whether to put extra money toward your mortgage or invest it can be a tough choice, and ultimately, it’s about what feels right for you. Paying extra on your mortgage gives you a guaranteed return, directly reducing your debt and saving you thousands in interest over the long haul. On the flip side, investing offers the potential for higher returns, but with that potential comes risk and uncertainty. While we do not provide investment advice and recommend seeking the opinion of a qualified financial advisor, market ups and downs mean there’s no sure bet you’ll come out ahead compared to the steady savings from your mortgage. The best choice depends on your financial goals, how much risk you’re comfortable with, and the returns you think you can achieve one way or the other.

 

Mortgage Calculator with Extra Payments

If you want to see the potential benefits of making extra mortgage payments, using a mortgage calculator with extra payments added in can help you see the potential impact on your loan. While this mortgage calculator is meant to show you what your monthly payments might look like depending on your purchase price and down payment rather than functioning as an extra payment mortgage calculator, you can still see the breakdown of how much you’d spend over the life of your loan making just the set payments. From there, you can get a clear idea of the impact of making extra mortgage payments.

*Treadstone Funding and its employees are not CPAs or financial advisors. Not financial advice. All information provided is for educational purposes only. Contact a licensed Loan Officer before proceeding.

 

Ways to Pay Extra on Your Mortgage

Making extra mortgage payments can be done in multiple ways, and one might be better suited to your financial needs than another, so it’s important to weigh your options and make a plan that won’t financially overwhelm you.

Prepay
Pay a lump sum toward your mortgage when you come into extra cash, like a tax refund or bonus, to significantly reduce your principal balance.

Paying a Little Extra Each Month
Add a specific amount to your regular monthly payment to steadily reduce your principal and save on interest over the life of the loan. To make the most out of your extra payments, consider dividing your monthly mortgage payment by 12 and adding that to each monthly payment.

Making an Additional Payment Each Year
If you’d rather take care of making one extra mortgage payment per year all at once, perhaps using part of your annual bonus or savings from other expenses, you can make the total additional payment.

When making extra mortgage payments, it’s crucial to ensure your additional payment is applied entirely to the principal balance. To do that, make sure you clearly specify your intent when making the payment. If you’re paying online, look for an option to indicate whether the extra amount should go toward the principal. When in doubt, if you want to be completely certain the payment is appropriately allocated, give your Treadstone Lender a call and we will make sure your extra payment lands where it’s supposed to.

 

Other Ways to Optimize Your Mortgage Repayment

Refinance
If your current mortgage payment isn’t working for you, you can consider replacing your current mortgage with a new one, usually at a lower interest rate or shorter term, potentially saving you thousands in interest. This strategy can reduce your monthly payments or allow you to pay off your mortgage sooner. However, be mindful of closing costs and fees associated with refinancing, as they can offset the benefits if you don’t plan to stay in the home long-term. Plus, the interest rates might not necessarily be favorable when you want to explore refinancing.

Make Biweekly Payments
Instead of making one monthly payment, switch to a biweekly payment schedule. The payments will feel more manageable with this spread-out structure.

Recast Your Mortgage
Recasting allows you to apply a lump sum payment to your principal and then adjust your monthly payments based on the new, lower balance. This can lower your monthly payments and reduce the total interest paid over the life of the loan. However, because mortgages are often sold to servicers after closing, different servicers have varying criteria and fees for recasting. Typically, you should wait at least 12 months after closing before considering this option. Adding to your principal payments monthly can be a simpler alternative.

 

Who Can Help Me Better Understand Extra Mortgage Payments?

At Treadstone, our team of experts is here to help you navigate the ins and outs of making extra mortgage payments. We can guide you through the process of optimizing your mortgage by showing you how additional payments can shorten your loan term and save you money on interest. Whether you’re considering biweekly payments, making one extra mortgage payment a year, or simply increasing your monthly payments, our Lenders will work with you to find the best strategy for your financial situation.

 

FAQs

Is it a good idea to make additional mortgage payments?
Making additional mortgage payments can be a great idea, especially if you want to reduce your total interest payments and shorten the term of your loan. However, it’s important to consider your overall financial situation and goals to ensure that extra payments align with your priorities.

How many years does one extra mortgage payment take off?
Making one extra mortgage payment a year can significantly reduce the number of years on your mortgage. For a typical 30-year mortgage, one extra payment annually could reduce the term by around 5 years, depending on the interest rate and the timing of the payments.

What happens if I pay two extra mortgage payments a year?
For starters, look at you go! For a typical 30-year mortgage, this strategy can potentially cut about 7 to 10 years off the loan, depending on the interest rate and the consistency of your payments.

What happens if I pay an extra $100 a month on my mortgage?
Paying an extra $100 a month on your mortgage will directly reduce your principal balance, which can save you money on interest and shorten your loan term. Depending on your total monthly payment, it might even be enough to make one extra mortgage payment a year. Over time, these additional payments can add up to significant savings and help you pay off your mortgage years earlier. Make sure to specify that the extra payments are to be applied to the principal to maximize these benefits.