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Thirty years is a long time. If you are paying off your mortgage every month, it may feel longer.
But what if you can eliminate the financial chain by paying off your mortgage early?
The fact is, if you can make up the equivalent of an additional payment for a mortgage every year, your loan will be reduced by an average of four to six years.
You can also save tens of thousands of dollars in interest expenses.
We will detail how it works, how much you can save, and what strategies you can use to squeeze out additional mortgages from your budget.
How it works
Most people cannot afford to buy a house entirely with cash.Instead, you pay part of the total cost, called down payment, The rest of the loan. That is your mortgage, which will usually be repaid within 20 or 30 years.
The principal and interest are the main components of your mortgage. The principal is the original amount you borrowed, and the interest is the fee charged by the mortgage lender for the money lent to you.
Your monthly recurring payment may also include Private mortgage insurance (PMI), once you pay off 20% of the principal, the fee will disappear.
In the beginning, most of your monthly mortgage payments are used to pay interest because your loan balance is so high. Only a small portion is used to repay the loan principal.
Repaying the principal means that the interest you owe each month will decrease because your loan balance will decrease.
Paying additional mortgages-and applying them to the principal-reduces your principal balance bit by bit, so you end up owing less interest over the term of the loan.
When you owe less interest, you can shorten the mortgage loan term by several years.
Additional principal payments can also build home equity and help eliminate PMI faster.
The PMI cost of traditional housing loans averages 0.58% to 1.86% of the original loan amount each year.
If you pay a 5% down payment for a 30-year loan term of US$275,000, you can pay US$126 to US$405 per month for PMI alone. The sooner you get 20% of the principal paid off, the sooner you can eliminate this additional monthly fee.
Here is how paying for an additional mortgage can save you thousands of dollars
Want to know what impact the additional mortgage will have?
think about it.
Suppose you own a 30-year mortgage on a $275,000 home with an interest rate of 4.5%. Your monthly recurring payment is $1,393.
Repayment date: November 2051
Total interest paid: $226,618
See how the total interest is almost equal to the purchase price of the house? Ouch.
If you pay an additional $1,400 per month in December each year, you will pay off your 30-year mortgage 4.5 years in advance and save nearly $40,000 in interest in the process.
Pay off date: May 2047
Total interest paid: $186,999
You read that right: you will not pay interest for $40,000.
But we realized that it might be difficult to cough up $1,400 before and after the holidays.
So let’s suppose you increase your mortgage payment by one-twelfth ($117) each month. Instead of paying $1,393, it is better to pay $1,510.
The result is almost the same, although paying an additional mortgage at the end of the year can save you even more interest.
Pay off date: June 2047
Total interest paid: $188,301
3 ways to pay for additional mortgages
You can pay for the additional mortgage in a year in several different ways.
No matter which method you choose, it is important to tell your loan provider that you want to apply the additional payment to your principal balance. Otherwise, the extra payment may be used to pay interest-this will not help you pay off your mortgage faster.
One-time payment
Save money throughout the year and put it in a special savings account. At the end of the year, the account is emptied to pay the 13th month payment.
You can deposit additional funds for tax refunds, work bonuses, or other unexpected income into your account for faster establishment.
Another option is to set up an automatic fixed deposit from your checking account to a savings account every month. This way, you won’t scramble to pay the bonus mortgage when December arrives.
Add extra dollars to each monthly payment
Divide your monthly mortgage payment by 12, and then add that amount to your monthly payment.
The additional amount should be automatically applied to your principal loan balance, but please check with your mortgage company just in case.
For some people, it is easier to pay a monthly fee slightly higher than the minimum payment than a one-time payment.
Bi-weekly payment
Some mortgage service providers allow you to register for a fortnightly mortgage payment. This allows you to pay half of your mortgage bill every two weeks instead of monthly.
Doing so will result in 26 half-payments or 13 full-month payments per calendar year.
Please note that if you choose to pay every two weeks, some lenders may charge additional fees, while others may not provide this service at all.
Before you start additional payment
Before you start paying for additional mortgages, please consult your loan company.
If you pay off the mortgage early, some lenders will charge an advance payment penalty.
If your mortgage includes this clause, you can still repay the loan early, but you need to save extra money to offset the advance penalty.
As we discussed earlier, it is important to ensure that any additional payments are applied to your mortgage principal. Most companies offer you this option online, but you may need to call them to confirm that your extra cash is used in the right place.
Finally, make sure that your finances are in good shape. You need to check your entire financial situation and determine if your dollars are more suitable to spend elsewhere.
Is complete absence of debt your top financial priority, or can your money serve you in other ways?
If your mortgage interest rate is low, it may be wiser to deposit extra money into your loan The company’s 401(k) plan, In addition to paying for your child’s college tuition or repaying other debts at a higher interest rate, such as credit cards and student loans.
You also need to maintain a Health Emergency Fund, There is enough money to cover your monthly expenses.
As long as you don’t neglect other financial goals and your budget is affordable, then the extra annual repayment is a smart way to pay off your mortgage faster.
You will not see the fruits of your labor immediately, but your hard work will be worthwhile when you own your own house years in advance.
Rachel Christian is a certified personal finance educator and a senior author of The Penny Hoarder.
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