Making Larger or More Frequent Payments One of the most achievable ways for most borrowers to pay off a home loan early is to pay more than the monthly minimum, either by adding extra toward the principal in the monthly payment or by paying more than once per month.
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.
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan.
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. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
Making additional principal payments reduces the amount of money you'll pay interest on – before it can accrue. This can knock years off your mortgage term and save you thousands of dollars.
This is equivalent to 12 slightly-higher monthly payments of $1,252.85 — but this small difference is enough to pay off your full debt in just 22 years and cost you only $129,712.85 in interest. In other words: two extra mortgage payments per year will save you eight years and $56,798.72 in interest.
When you make an additional payment, you have the option to apply it toward your loan's principal. This will gradually chip away at your loan balance and could ultimately reduce the amount of interest you pay over time. As your loan balance decreases, the amount of interest added to each payment also drops.
the extra $500 goes towards the principle only and the loan. Gets paid down much faster, your saving a lot of money over the years in interest. Talk to your lender and he will tell u how much you will save and how much faster the loan will be paid off. It is a good thing to do if you can.
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.
Making an extra payment on your mortgage can help you pay off your mortgage early. It also helps reduce the principal balance quicker which means there is less principal to gain interest. In the long run, your extra payments could help you save money as well as reducing the length of your loan term.
Options to pay off your mortgage faster include:
Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
Before paying off a loan ahead of schedule, it's important to read the fine print. Based on the terms of your loan, you could be subject to a prepayment penalty for paying off your mortgage early. Typically, loans older than three years are not subject to this type of penalty.
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.
The 10/15 rule
If you can manage to pay 10% of your mortgage payment every week (in addition to your usual monthly payment) and apply it to the principal of your loan, you can pay off your 30-year mortgage in just 15 years.
Mandy Phillips, a mortgage loan originator at Vista Home Loans, ran the numbers with the average property taxes and homeowners' insurance for California to find that buyers with a $2,000 budget could afford a $301,000 purchase price. But purchasing power changes a bit when looking at properties that require an HOA fee.
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
Many people choose to schedule their mortgage payment on the first of the month to coincide with their monthly paycheck. This can make it easier to budget and ensure that the payment is made on time.
One Additional Payment Per Quarter
Making an additional payment each quarter results in four extra payments per year. On a $220,000, 30-year mortgage with a 4% interest rate, you would cut 11 years off your mortgage and save $65,000 in interest.
If you are under 45, it's difficult to argue that your dollars would be better served paying off your mortgage unless you are on Step 9, pre-pay low-interest debt. You should aim to be completely debt-free by retirement, and after age 45 you can begin thinking more seriously about pre-paying your mortgage.
By adding $300 to your monthly payment, you'll save just over $64,000 in interest and pay off your home over 11 years sooner.
Paying more toward your principal can reduce the interest you'll pay over time. Because every payment that goes toward the principal builds equity in your home, you can build equity faster with additional principal-only payments.