An extra mortgage payment will cut down on the length of your mortgage and reduce the amount of interest you will pay over the life of your loan. How much you will save depends on the size of your loan and the interest rate. An extra mortgage payment also socks money away in your home’s equity to borrow from later.
Lower Your Interest – The higher your interest rate, the more you will save by making extra payments. A modest increase on the monthly mortgage payments can save you tens of thousands of dollars. If you make one additional mortgage payment annually, you can reduce the loan term by 5 – 7 years. Or if one extra payment seems unrealistic, even a modest increase on the monthly mortgage payments can save you tens of thousands of dollars.
Payment Schedule – To reduce interest accrued, check with your lender to see if you can use a bi-monthly payment schedule. Further, if you can split the mortgage to two payments per month, instead of one hefty sum, you may be able to pay more. For example, two mortgage payments of $1100 a month is easier to manage than one mortgage payment of $2000. With this example, you would be contributing an extra $200 a month towards your mortgage to equal more than one extra payment per year ($200 x 12 months = $2400).
Cash Poor – Would making extra payments on your mortgage throw your whole budget out of whack? Do you live paycheck to paycheck? Maybe you could really use the cash for would-be extra payment on other commitments or improvements. Decide if you can afford to pony up more cash now to save thousands later. But, don’t over-commit funds that you don’t have.
Debt and Retiring – If you are working to pay down your debt, devote any extra money to your credit card bills first. Credit card interest rates are much higher than your mortgage interest, so prioritize your debt reduction before submitting an extra mortgage payment. Additionally, make sure that your emergency and retirement funds are up to par before adding more to your mortgage.
This was a guest post by NewYorkBankingRates.com, a site that provides daily updates on the latest New York CD rates, finance information and more.