As a general rule of thumb, making one extra mortgage payment per year at the start of your 30-year mortgage can shorten the term by approximately four to five years. You could potentially pay off the mortgage and own the home outright in 25 to 26 years instead of 30.
The truth is, if you can scrape together the equivalent of one extra payment to put toward your mortgage each year, you'll take — on average — four to six years off your loan. You'll also save tens of thousands of dollars in interest payments.
Options to pay off your mortgage faster include:
Pay extra each month. Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
By making two extra mortgage payments a year, you're prepaying principal that would otherwise accrue interest over the life of the loan. Plus, those payments are accelerating repayment because they're payments you would have made anyway.
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.
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.
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.
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. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
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.
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 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.
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.
As noted above, your estimated monthly payment for a $500K mortgage will be $3,360.16, assuming a 30-year loan term and an interest rate of 7.1%. But this payment could range between $2,600 and $4,900 depending on your term and interest rate.
Over the course of the year, you will have paid the additional month. Doing so can shave four to eight years off the life of your loan, as well as tens of thousands of dollars in interest. However, you don't have to pay that much to make an impact.
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.
The money you send is meant to apply directly to the loan principal, not the interest. And paying additional principal on a mortgage means saving money. When the principal amount shrinks, the dollar amount of interest on it declines, too. This slashes the total interest you'll owe over the life of the loan.
If your bank takes the extra payment and applies it to interest first, you can work around this by paying your extra payments at the same time that you make your monthly payment. This way the money will go towards the principal.
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.
If I Make $50,000 A Year What Mortgage Can I Afford? You can afford a home price up to $190,000 with a mortgage of $186,559. This assumes a 3.5% down FHA loan at 7%, a base loan amount of $183,350, financed upfront mortgage insurance premium of 1.75%, low debts, good credit, and a total debt-to-income ratio of 50%.