Benefits of making extra mortgage payments
Looking to get ahead on your mortgage? If you have a 15- or 30-year fixed rate loan on your home and can afford to make an extra payment, this can help you pay off your mortgage sooner and potentially lower the amount of interest you pay. Any amount that you can afford to pay each month can be applied to principal balance (make sure you inform your bank you want the extra applied to principal), therefore reducing the amount you’ll pay in interest over time.
Does making extra mortgage payments make sense for you?
Making extra payments to decrease the length of the mortgage and lower the amount of interest you pay sounds like a great plan for borrowers who have the cash to afford it. Who doesn’t want to own their home outright and not have a mortgage as soon as possible?
Paying extra in order to reduce your mortgage by a few years can be a great option, but only if you plan to live in your home for all those years. If there’s a decent chance you’ll be moving and selling your home before then, you might never realize the benefits of making the extra payments. It’s worth considering your long-term plans before making this decision.
If you’re sitting on extra cash but plan to relocate within a few years, there are of course other options for setting yourself up for a successful financial future besides making extra mortgage payments. These options include investing more into a retirement fund or the stock market or focusing on paying off other debts you might have.
Other options to get ahead
If making an extra payment isn’t feasible for you, there are other options to consider. These include the dollar-a-month increase and round-up strategies. The former simply involves paying one dollar more on your mortgage payment each month. For example, if your monthly payment is $850, pay $851 the next month, followed by $852 and so forth. This might seem insignificant, but it will add up over time and reduce your mortgage term. The round-up strategy is what it sounds like: aim to round your mortgage payment up to the next hundred-dollar amount. If your mortgage payment is $875 a month, see if your budget will allow you to pay $900 next month.
As always, when you make a payment larger than what’s due, it’s imperative that you inform your bank that the extra dollars should be applied to principal.