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
Normally, when you pay your mortgage, some of the money you send over is applied to your loan's principal, and some is applied to the interest portion. An extra payment, however, will generally be applied to the principal only -- and you can always reach out to your loan servicer and make sure that's the case.
What happens if I make extra payments on my mortgage? ›
Paying a little extra towards your mortgage can go a long way. Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you'll pay.
How many years does one extra mortgage payment take off? ›
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.
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.
Doing so can shave four to eight years off the life of your loan, as well as tens of thousands of dollars in interest. However, you don't have to pay that much to make an impact. Even paying $20 or $50 extra each month can help you to pay down your mortgage faster.
How do you pay off a 30 year mortgage in 15 years? ›
The choice comes down to careful study and a decision based on your financial position and ability to repay what will be higher monthly payments.
- Pay Extra Each Month. ...
- Pay Bi-Weekly. ...
- Make an Extra Mortgage Payment Every Year. ...
- Refinance with a Shorter-Term Mortgage. ...
- Recast Your Mortgage. ...
- Loan Modification. ...
- Pay Off Other Debts.
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.
What happens if I pay an extra 100 a month on my mortgage? ›
When you pay an extra $100 on your monthly mortgage payment, that entire amount goes to principal. You'll reduce your total balance much more quickly when you make an extra payment that goes directly to repaying your balance. You could cut around four years off your repayment time with just an extra $100 per month.
What happens if I make an extra payment on my 30 year mortgage? ›
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.
How to pay off a 250k mortgage in 5 years? ›
Increasing your monthly payments, making bi-weekly payments, and making extra principal payments can help accelerate mortgage payoff. Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster.
If you currently have a 30-year loan, Ramsey suggested refinancing it for a shorter term. This can get you out of debt faster. However, if your current mortgage has a very low interest rate, you might want to stick with what you have and simply make larger monthly payments to pay off your mortgage early.
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.
Why does it take 30 years to pay off $150,000 loan even though you pay $1000 a month? ›
Answer and Explanation: The interest rate on a loan directly affects the duration of a loan. Note: The interest rate is calculated using the hit and trial method. Therefore, it takes 30 years to complete the loan of $150,000 with $1,000 per monthly installment at a 0.585% monthly interest rate.
Is it smart to make an extra mortgage payment a year? ›
That one additional payment may help you pay off your mortgage as much as three to four years early—and if you make more than one additional payment per year, it's even faster! Not only do you save money on interest, but you'll be clear of having a mortgage payment at all much more quickly.
Is it true if you pay your mortgage twice a month? ›
Bottom line. If done right, making biweekly mortgage payments leads to less interest paid over the life of your loan, saving you money and whittling your balance down sooner. However, you must confirm that the extra payments are being applied to the principal and that you're not subject to prepayment penalties.
What time of month should I make an extra mortgage payment? ›
If you have the money near the end of a month, try to make the extra principal payment before the end of the month and not let it slip to the following month. You will stop the interest for a full month by the difference of a few days.
What happens if I pay an extra $100 a month on my mortgage? ›
When you pay an extra $100 on your monthly mortgage payment, that entire amount goes to principal. You'll reduce your total balance much more quickly when you make an extra payment that goes directly to repaying your balance. You could cut around four years off your repayment time with just an extra $100 per month.
What happens if I pay 2 extra mortgage payments a month? ›
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.
How to pay off a 30-year mortgage in 5 to 7 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.
To pay off your mortgage early, you'll need to increase your monthly payments and apply additional funds to your principal balance. For some people, this might involve finding ways to boost their income, or re-budgeting and cutting back on unnecessary expenses.
