A typical mortgage has a 30-year term, meaning you don't actually own your home until you've made payments for roughly a third of your life. So it makes perfect sense you might consider making some extra mortgage payments -- i.e., payments in addition to your required monthly payments -- a few times a year to try and shorten your sentence.
Most mortgage lenders will be happy to let you make extra payments. Modern mortgages rarely include prepayment penalties. But just because you're allowed to make extra payments doesn't mean it's the right move.
Here's a look at what happens when you make extra mortgage payments.
Designated early payments
Any mortgage payment you make over and above your regularly monthly payment will still be applied to the current month. They're considered to be extra payments and not early payments. In other words, making an extra payment in May doesn't mean you can pay less in June. You'll still be expected to make your regular June payment.
In most cases, if you want to prepay your mortgage payment for a future month, perhaps because you'll be on vacation, you'll need to contact your mortgage lender. It can specifically designate your additional payment as an early payment so it correctly applies to the next month.
Paying down your principal
The fact that extra payments count toward the current month is actually a good thing. It means those additional funds go entirely toward paying off your loan principal.
What many folks don't realize is that a big portion of your ordinary monthly mortgage payment actually goes to paying the interest fees (especially in the first few years). Since only a small portion of your payment goes to the principal, it can take years to make much progress.
Even one or two extra mortgage payments a year can help you make a much larger dent in your mortgage debt. This not only means you'll get rid of your mortgage faster; it also means you'll get rid of your mortgage more cheaply. A shorter loan = fewer payments = fewer interest fees.
You can -- but should you?
Alright, so we've seen what happens when you make extra payments. Now it's time to consider if it's actually a good idea. While there are certainly benefits to making extra payments, it might be the wrong move for some homeowners.
For instance, if you were lucky enough to pick up a mortgage when rates were at record lows -- they got down into the 2% to 3% range before they spiked again -- then making extra mortgage payments may not be the best use of your money. Instead, you should work on paying off other (read: higher interest) debts.
If you're debt free (good job!), that money could probably be better used in a retirement or brokerage account. Barring all that, even just putting that money in a high-yield savings account could provide double the return on your investment than you'd get from extra payments on a low-interest mortgage loan.
That being said, if your mortgage has a higher interest rate -- current rates are over 6% -- well, then that could be a different story. You'll be hard-pressed to get a 6% return on a savings account, so it could be beneficial to make a principal-only payment a few times a year.
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FAQs
Save on interest
What happens when you make an extra mortgage payment? ›
Any mortgage payment you make over and above your regularly monthly payment will still be applied to the current month. They're considered to be extra payments and not early payments. In other words, making an extra payment in May doesn't mean you can pay less in June.
How to pay off my 30 year mortgage in 15 years? ›
Options to pay off your mortgage faster include:
- Pay extra each month.
- Bi-weekly payments instead of monthly payments.
- Making one additional monthly payment each year.
- Refinance with a shorter-term mortgage.
- Recast your mortgage.
- Loan modification.
- Pay off other debts.
- Downsize.
No matter how much extra you pay each month, that amount can help shorten the life of your loan. Even making one extra mortgage payment each year on a 30-year mortgage could shorten the life of your loan by four to five years.
What happens if I make a lump-sum payment on my mortgage? ›
A lump-sum mortgage payment is a one-time, substantial payment made towards your mortgage principal. This payment is over and above your regular mortgage payments and directly reduces the principal amount owed, allowing homeowners to save on interest and potentially shorten the mortgage term.
How to pay off a 30 year mortgage in 10 years? ›
Here are some ways you can pay off your mortgage faster:
- Refinance your mortgage. ...
- Make extra mortgage payments. ...
- Make one extra mortgage payment each year. ...
- Round up your mortgage payments. ...
- Try the dollar-a-month plan. ...
- Use unexpected income. ...
- Benefits of paying mortgage off early.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
How to pay off 250k mortgage in 5 years? ›
There are some easy steps to follow to make your mortgage disappear in five years or so.
- Setting a Target Date. ...
- Making a Higher Down Payment. ...
- Choosing a Shorter Home Loan Term. ...
- Making Larger or More Frequent Payments. ...
- Spending Less on Other Things. ...
- Increasing Income.
When it comes to paying off your mortgage faster, try a combination of the following tactics:
- Make biweekly payments.
- Budget for an extra payment each year.
- Send extra money for the principal each month.
- Recast your mortgage.
- Refinance your mortgage.
- Select a flexible-term mortgage.
- Consider an adjustable-rate mortgage.
If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
Just making two extra mortgage payments a year can save you tens of thousands of dollars and cut years off your loan. When we discuss making two extra mortgage payments a year, we don't mean that you have to make extra payments exactly twice a year.
What happens if I pay $1000 extra a month on my mortgage? ›
Save on interest
Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.
What happens if I pay an extra $2000 a month on my mortgage? ›
The additional amount will reduce the principal on your mortgage, as well as the total amount of interest you will pay, and the number of payments.
What happens if I pay $500 extra a month on my mortgage? ›
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
What is the quickest way to pay off a mortgage? ›
Make extra payments
A potentially simpler way for homeowners to pay off their homes quicker and save on interest charges is by making extra payments. There are three primary methods for making extra payments – pay extra each month, make a lump sum payment or switch to bi-weekly payments.
Is it better to overpay mortgage monthly or annually? ›
But if the choice is between chipping away at your outstanding mortgage by making monthly overpayments – which reduces the amount of interest you pay – and waiting until the end of the year to bring down your mortgage balance, I would say monthly overpayments would be more beneficial.
What happens if I make 1 extra mortgage payment a year? ›
As a general rule of thumb, making one extra mortgage payment per year at the start of your 30-year mortgage can shorten the term by approximately four to five years. You could potentially pay off the mortgage and own the home outright in 25 to 26 years instead of 30.
Is it true if you make one extra mortgage payment? ›
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
Is it worth making extra mortgage payments? ›
That said, “if it fits into your budget, you want to get rid of the debt and you're in good shape with other savings or investing goals, make extra payments on your mortgage,” says Linda Bell, senior writer at Bankrate. “Every additional dollar shaves time off your loan and saves you interest.”
