The power of additional mortgage payments

Mortgages can be viewed very differently.

Some see it as a positive financial tool, a way to free up their money so it can be invested elsewhere, to achieve a better return.

Then there are those who view the mortgage as the root of all evil, as a pile of debt that needs to be eliminated as quickly as possible.

Whatever your situation, you’ve probably considered making an “extra mortgage payment,” although you may not know the exact impact, due to the complexity of mortgage amortization.

Fortunately, there are early bonus calculators available that take the guesswork out of the process and make it easier to see how much you can save in a number of different scenarios.

Add an additional mortgage payment of $10 per month

  • Even add a nominal amount like $5 or $10
  • On a monthly basis over a long period of time
  • It can save you thousands of dollars on your mortgage
  • And shorten your loan term at the same time

Let’s start with a simple scenario where you add just $10 per month as an additional payment to the principal amount.

Assuming you take out a loan amount of $100,000 at 4% on a 30-year fixed mortgage, the extra payment of $10 will save you $3,191.81 over the entire term of the loan.

This will also shorten your mortgage by 13 months, meaning your 30-year mortgage will be a 28-year mortgage.

So this is good news, right? You can save thousands and only have to pay an extra $10 per month. You probably won’t even notice the difference.

What if I raised this additional payment to $25? Well, you would cut 32 months off your mortgage, that’s roughly three years, and reduce your total interest by $7,450.04.

Feeling ambitious? Add $100 per month and you reduce the term by 101 months, or approximately 8.5 years, while saving $22,463.79 in interest.

You can also make your mortgage payments a solid, round number and save money that way, too.

The world is truly your oyster, as long as your loan servicer understands and accepts that these payments will go toward the principal balance owed.

Speaking of which, make sure it’s crystal clear that any extra payments are going to the right place. Often, you cannot make split payments, or payments that are less than the total amount owed.

So any additional amount must be above the minimum amount due for that month.

Some providers will allow you to specify where extra amounts should go, such as your escrow account or principal balance.

If your goal is to pay off your mortgage faster, you’ll want to aim it toward the principal balance.

advice: If you can’t commit to the higher monthly payments associated with a 15-year fixed mortgage, the extra payments may provide similar savings on a 30-year fixed mortgage.

Additional mortgage payments are more valuable early on

  • You can get more value from your additional mortgage payments early in the loan term
  • Because the remaining balance is larger in the beginning
  • Early payments consist mostly of interest (charged in advance).
  • Any additional payments will reduce future interest for the remaining months, which will be more abundant if you make them during the early years

As you can see, it’s not difficult to save a lot of money with extra mortgage payments, but it’s also important when you start making those extra payments.

Using our $100 example, if you started making extra payments in year 6 of your 30-year mortgage (month 61), you would only save $15,095.21, and only lose 78 months on your mortgage.

Even if you procrastinate for just one year to start the extra $100 payment, your total savings will drop to $20,989.55, and only eight years of your mortgage term will go away.

In short, the earlier you start making extra payments, the more you’ll save. This is mainly because mortgage payments are more interest-bearing at the beginning of the term.

[Are biweekly payments a good idea?]

One additional lump sum payment on a mortgage

  • An additional lump sum payment on your mortgage can be more valuable
  • If this is done soon after you get your mortgage
  • Its value diminishes over time because the interest accrued is less later in the loan term
  • But it can be a better option than paying less each month

Now let’s say you have some extra money and want to make a lump sum payment to reduce your mortgage balance.

Using the same loan details as above, if you make an additional one-time payment of $5,000 toward the loan principal in month 13, you will save $10,071.67 and reduce the loan term by 31 months.

Surprisingly, this extra mortgage payment will save you money every month for the next 30 years.

Just take a look at how much interest is paid each month after making an extra mortgage payment versus the same home loan without additional payments below.

As you can see, payment 14 above consists of $310.30 in interest, while it would be $326.96 for a mortgage with no additional payments.

At month 15, we see the same disparity, with the interest being $309.74 versus $326.46. Therefore, every month after the additional payment is made, interest savings are achieved.

No extra

Assuming the loan term is 360 months, it’s easy to see how the savings can add up over time.

Of course, the borrower who pays extra won’t have to make payments for the full 360 months because he or she will also end up paying off their mortgage ahead of schedule.

Now I mentioned that paying extra early in the loan term can save you more because you can address these interest expenses before you start paying them off naturally.

For example, if you make the same additional payment of $5,000 at the beginning of year 6 of your mortgage (instead of the beginning of year 2), your total savings drops to $7,943.99 and your term is reduced by just 27 months.

So, again, it matters when you pay extra.

Make an extra mortgage payment each year

  • Some homeowners prefer to make an additional payment each year
  • Maybe it’s from a tax refund check or from an end-of-year bonus at work
  • This is another good strategy to reduce your mortgage term and save a lot of money
  • And make sure that the bonus money you receive is put to good use rather than spent frivolously

You can also make one additional lump sum payment at the beginning of each year, perhaps after receiving your year-end bonus.

Let’s say you pay a $1,000 bonus every year in January, starting on month 13.

This would save you $19,005.22 in interest and shave 85 months (just over 7 years) off your loan term.

As you can see, there are all kinds of scenarios abound here, and which one you choose, if any, is up to you.

You might claim that mortgage rates are too cheap, and therefore decide that making extra payments now doesn’t make financial sense.

Or maybe you’re living in your dream home not far from retirement, hoping to live “free and clear” sooner rather than later.

If so, making the extra payments now could be very attractive. Refinancing your mortgage for a shorter term can also make a lot of sense.

Just remember that plans (always) change; Homeowners are more likely to move or refinance their loans rather than continue them through the end of the term.

So, while mathematics may interest you, it may not work in reality.

How to pay extra on your mortgage

Additional mortgage payment

If you’re looking to pay extra principal on your mortgage, it’s fairly simple. Although there are some things to consider to ensure it is treated properly.

After all, the last thing you want is to miss a mortgage payment or delay it when you’re trying to save some money.

When you go online to make your regular mortgage payments, you should see a section called “Extra Payments” or “Additional Principal.”

In this section, you can enter any number you want that exceeds the minimum amount due, which is your regular mortgage payment.

For example, if your payment is $3,316.27 per month, you can allocate an additional principal to your payment, say $100.00.

This will bring your grand total to $3,416.27, with the extra going toward paying off your loan balance ahead of schedule.

It will save you interest over the rest of the loan term, but it won’t reduce future payments. Any remaining payments will still be $3,316.27 per month.

Also note that you may see the option of paying an additional amount toward your escrow account, assuming there is a deficit or anticipated shortfall. This has nothing to do with paying off your loan faster.

For those paying by phone, explain to the representative exactly what you are trying to achieve, with any excess amount directed toward the principal balance.

If you pay by mail, there may be a section on the payment slip regarding the additional principal. Simply type the amount you want to allocate.

What about partial mortgage payments?

The option to make a partial payment may also be listed on your loan provider’s payment page, but this is different from an additional payment.

This option is usually reserved for those who are behind on their mortgage and are looking to catch up.

This often results in funds being held aside until enough is allocated for full payment.

For example, if you make a partial payment of $1,000 may be placed in “Pending Account” until the remaining $2,316.27 is sent (using the same payment example above).

In some cases, the money may simply be refunded to you if the amount owed is not full.

I assume it can also be used for bi-weekly payments, assuming the provider accepts that arrangement.

The key here is to make sure you make at least the minimum payment before paying anything extra. And make sure it is allocated correctly.

If you’re not sure, it may be best to contact your loan servicer directly to make sure payments are being made as expected.

Even if you’re “sure,” it may be worth checking with your provider before paying anything other than the amount owed.

Read more: Should you pay off your mortgage early?

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