This amortization schedule shows that paying an additional $300 each month will shorten the life of the mortgage from 30 years to about 21 years and 10 months (262 months vs. 360). It will also reduce the total amount of interest paid over the life of the mortgage by $209,948.
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.
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.
Over the course of a loan amortization you will spend hundreds, thousands, and maybe even hundreds or thousands in interest. By making a small additional monthly payment toward principal, you can greatly accelerate the term of the loan and, thereby, realize tremendous savings in interest payments.
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.
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.
Save on interest
Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.
This amortization schedule shows that paying an additional $300 each month will shorten the life of the mortgage from 30 years to about 21 years and 10 months (262 months vs. 360). It will also reduce the total amount of interest paid over the life of the mortgage by $209,948.
Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
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.
It will cost about 10–20% more to pay off a 30 year mortgage in 15 years than to take a 15 year mortgage and pay it off in that time. Generally, that's how much higher mortgage interest rates are on 30-year versus 15-year mortgages, about 10–20% higher.
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.
As you can see, it's possible to save $84,655 in interest and pay off your mortgage in half the time by refinancing from a 30-year to a 15-year term. Something to consider before refinancing, however, are mortgage closing costs, which typically total 2% to 3% of the loan amount.
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.
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.
Bottom line. 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.
If you don't specify that the extra payments should go toward the mortgage principal, the additional money will go toward your next monthly mortgage payment. That means it will get split between principal and interest, making it less impactful for your goal of paying off your loan early.
Both twice-monthly and biweekly payments generally do not alter the amount of mortgage interest you can deduct from your taxes. However, since biweekly payments result in an extra payment each year, you may pay more of your loan's principal earlier, which could slightly decrease your interest deduction over time.
If you haven't started saving for retirement yet, or you're not maxing out your retirement savings accounts, it's a good idea to prioritize that over making extra mortgage payments. Your money will grow by leaps and bounds in these retirement accounts while, at the same time, your house will be appreciating in value.
Monthly payments: Paying extra on a mortgage doesn't normally lower your monthly payment, so you'll still need to keep that regular monthly payment in mind. Cash flow: With extra payments going toward your mortgage, you may have less cash to spend on other necessities.