Making 2 extra mortgage payments a year can lead to substantial savings on interest and help you pay off your mortgage years earlier. However, the exact impact depends on a few different factors, including your loan terms, interest rate, and how early in the loan term you start making additional payments.
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.
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. Using the calculator above, you can input your loan specifics to learn how making an extra payment could affect your mortgage.
You decide to increase your monthly payment by $1,000. With that additional principal payment every month, you could pay off your home nearly 16 years faster and save almost $156,000 in interest.
Making extra mortgage payments may unlock various financial benefits including interest savings, early loan payoff, building equity faster, and increased financial flexibility.
Can you skip two mortgage payments? Some mortgage lenders advertise the chance to skip not just one, but two months of payments. This can be risky, but it could also help you through a cash crunch.
Some mortgages allow you to overpay as much as you want, but others limit overpayments to a percentage of the amount you owe. On many mortgages, this maximum limit is 10% of the outstanding balance per year. Bear in mind that you could be charged a penalty fee if you overpay by more than the allowed limit.
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
Dave Ramsey, the renowned financial guru, has long been a proponent of financial discipline and savvy money management. This can include paying off your mortgage early, but only under specific financial circumstances.
Making an extra mortgage payment each year could reduce the term of your loan significantly. The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you'll have paid the equivalent of an extra payment by the end of the year.
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.
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.
Switch to Biweekly Payments
Making biweekly payments instead of monthly payments results in one additional payment each year. Using the example above, making one full, extra mortgage payment each year will reduce the amount of time it takes to pay off your 30-year mortgage, but only by five years.
A good way to remember the documentation you'll need is to remember the 2-2-2 rule: 2 years of W-2s. 2 years of tax returns (federal and state) Your two most recent pay stubs.
Most banks and private lenders also use credit to determine the interest rates for different borrowers. If you are wondering whether taking a second mortgage will hurt your credit, then the simple answer is No.
Two missed mortgage payments
Once you're 45 days past due, your loan servicer may assign someone to your account. They'll contact you and let you know about your options. After 60 days — or two missed mortgage payments — you'll incur a second late fee. The late payment will also be reported to the credit bureaus.
Put simply, you will save significant amounts in interest. Most mortgage contracts allow borrowers to make extra payments, and they allow all of the extra money to be applied to the principal amount of your loan. That means you are paying down the real amount of the loan – the money you borrowed – faster.
An annual income of about $76,000 should put you in the position to afford a $250,000 mortgage, assuming you have relatively little other debt. But exactly what amount you'll need to earn will depend on your interest rate, loan term, and debt level, among other factors.
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.
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.
The 35/45 rule
With the 35/45 model, your total monthly debt, including your mortgage payment, shouldn't exceed 35% of your pre-tax income or 45% of your after-tax income. To estimate your affordable range, multiply your gross income before taxes by 0.35 and your net income after taxes by 0.45.
Both the principal and your escrow account are important. It is a good idea to pay money into your escrow account each month, but if you want to pay down your mortgage, you will need to pay extra money on your principal. The more you pay on the principal, the faster your loan will be paid off.