Making one extra mortgage payment a year might not sound like a huge financial move, but the long-term benefits can be significant. The strategy helps you pay off your loan early, increases the speed at which you build home equity, and, most importantly, reduces the amount of interest you pay over the life of your loan. Here’s what to know about this approach and how to make it work for your budget and goals.
Most mortgage loans are amortized — meaning the amount you owe (plus interest) is divided up into even payments across your entire loan term. You’ll make the same payment every month and every year until the loan is fully repaid.
With this approach, the bulk of your payments tends to go toward interest at the beginning of your loan term. During this period, you won’t see much progress in paying off your mortgage principal. Then, as you get further into your loan, more of your payments start to go toward the principal, and you’ll see your balance whittle away faster.
To gain a deeper understanding of mortgage amortization with real numbers, use our mortgage payment calculator below and click on “Amortization” to see an annual and monthly breakdown.
When you make an extra payment every year — or potentially more than that — you alter the impact that amortization can have. You’re able to start reducing that principal balance sooner, lower the amount of interest you pay each year, and pay off your loan faster. We’ll go more into each of these benefits below.
If you’re like nearly 90% of American homeowners, you probably have a 30-year mortgage for your home. So, if you stick to your payment schedule and make one payment every month, you can expect to be mortgage-free in three decades.
If you make an extra payment on your mortgage each year, though — 13 payments instead of 12 — you can shorten that repayment time by several years.
For example, let’s say you have a $300,000 mortgage with a 30-year loan term and a fixed interest rate of 6.25%. Your monthly payment is about $1,847, but you make 13 payments of $1,847 per year rather than 12. That single extra annual payment will shave more than five years off your repayment term, allowing you to pay off your balance in 24 years and 7 months rather than the full 30.
The exact amount of time you can take off your repayment term with this strategy depends on your mortgage loan balance, remaining payment term, and interest rate. But the higher each of these factors is, the bigger the impact your annual extra payment will have.
The amount of interest you pay each month is based on the remaining balance of your loan. So, the faster you’re able to reduce your balance, the less you’ll pay in interest, both monthly and in total over the long haul. This means that making any additional payments toward your loan — even if it’s just once per year — will directly reduce your interest costs.
Let’s go back to that $300,000, 30-year fixed-rate mortgage at a 6.25% interest rate. If you only make the required $1,847 monthly payments toward the principal and interest, you would pay $364,975 in interest over the life of the loan.
However, adding an extra $1,847 payment each year would not only shave off over five years of payments but also reduce the interest paid to $287,708. That’s a total savings of more than $77,000 by the end of your loan term.
Making additional mortgage payments also helps you build equity in your home faster. Home equity refers to the difference between the money you owe on your mortgage and how much the house is worth. Essentially, it’s the portion of the home you actually own — the stake not currently levered by your mortgage loan.
When your home’s value increases, either because local home prices rise or you’ve improved the property, your equity stake increases. You also build equity by paying down your mortgage balance.
And making one extra mortgage payment per year helps you reduce this balance more quickly and, therefore, build equity faster.
Home equity helps you build wealth, and it’s a powerful thing. Building equity can help you accomplish the following:
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Cancel private mortgage insurance (if you made a down payment of less than 20%). This would reduce your monthly payment.
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Take out home equity loans or home equity lines of credit (HELOCs). These can be used toward home improvements, paying off higher-interest debts, or other expenses.
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Enjoy bigger profits when you sell the home.
It’s impossible to calculate exactly how much faster you can build home equity by making one extra payment per year, since it depends on your home’s value, but reducing your total payoff time and the amount of interest you pay will always speed up the process.
If you can’t afford to make one extra mortgage payment a year, other strategies can help you reduce your balance and pay off your home loan faster. Some of these include:
You don’t have to make an annual extra payment to have an impact. In fact, making an extra payment just one time during your loan term can make a noticeable difference.
For example, if you have a $300,000, 30-year mortgage at a 6.25% rate and make just one extra payment of $1,847 in the first year, it would shave six months off your 30-year term and reduce your total interest by about $10,000.
Another easy way to make an extra payment each year is to make half-payments on your mortgage every two weeks. For example, if you have a $2,000 monthly mortgage payment, you would make a $1,000 payment every other Friday. By the end of the year, this would amount to $26,000 in total payments (since there are 52 weeks in a year) — $2,000 more than you’d have paid by sticking to the monthly repayment plan.
Biweekly mortgage payments can sometimes be easier on your budget than making a single, large payment all at once, as it allows you to spread out the costs more and often aligns better with pay schedules. Just make sure your mortgage lender allows for this option first (not all lenders do).
Increasing your monthly payment by even a modest amount can make a big difference. For example, adding an extra $20 per month to your monthly mortgage payment on the $300,000 mortgage above will reduce your repayment term by almost a year and save you more than $13,000 in interest.
Be sure you ask your lender to put the extra amount straight toward your principal balance, though — not your principal plus interest. This will ensure it’s the most impactful on your long-term costs and payoff timeline.
You can still make the equivalent of one extra mortgage payment each year, but without paying it all at once. For example, instead of paying the full $1,847 in one lump sum, divide it by 12 and pay roughly $154 more each month.
You don’t need a big overarching plan to make a difference on your mortgage loan. You can also put extra cash toward your loan sporadically, whenever it becomes available.
For instance, if you get a larger-than-expected tax refund, you can put it toward your mortgage. You can do the same with holiday bonuses, inheritances, birthday money, tips, and commissions.
Before making extra mortgage payments, you’ll want to examine your budget. If putting more toward your loan would hinder your ability to pay bills or afford your household necessities, it likely isn’t worth it.
Similarly, if you’d need to dip into savings to make the extra payment, you may want to reconsider. Experts generally recommend having at least three to six months of expenses saved up in case of an emergency. Make sure you have this on hand before using savings toward other purposes.
You should also think about your plans as a homeowner. If there’s a chance you’ll move soon, putting more money into your home probably isn’t worth the effort. The longer you stay in the house, the more you’ll reap the rewards of making extra payments.
If you make two extra mortgage payments per year, you could shave several years off your repayment term and save thousands in interest. For instance, two extra annual payments on a $300,000 30-year fixed-rate mortgage at 6.25% would cut your repayment term by nine years and save you almost $125,000 in interest.
Paying an extra $100 each month on your mortgage principal can add up to big savings, but the exact impact depends on your loan balance, interest rate, and other factors. On a $300,000 30-year fixed-rate mortgage at a 6.25% interest rate, your savings would be roughly $57,000 in interest, and you’d shorten your repayment term by almost four years.
Paying extra on your mortgage could be a sound financial strategy if you have a bit of extra cash to spare. Whether you add a little to your monthly payment or make regular extra payments throughout the year, you’ll lower your balance faster and likely pay less in interest over the life of your loan.
You will need to make extra payments toward your 30-year loan to pay it off in 15 years. This may mean increasing your monthly payments, making biweekly payments, or using some other strategy. The exact approach and amount you’d need depend on your loan balance, interest rate, and budget.
The exact amount depends on your loan balance, interest rate, and other factors. Making one extra payment on a $300,000 loan at a 6.25% interest rate, for example, would reduce your payoff timeline by about six months.
Laura Grace Tarpley edited this article.
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