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.
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.
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.
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.
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.
You'll still be paying off your loan for decades — right? Not necessarily. Even making small extra payments over time can shave years off your loan and save you thousands of dollars in interest, depending on the terms of your loan.
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.
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.
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.
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.
You might want to pay off your mortgage early if …
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
Is it better to pay the principal or interest on a mortgage? 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.
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.
By making what amounts to one extra full payment every year, biweekly payments pay off your mortgage faster than monthly payments, ultimately saving you more money. A monthly payment plan allows for 12 full payments each year (one every month).
Paying down the principal means you owe less interest each month because your loan balance shrinks. Making extra mortgage payments — and applying them to the principal — reduces your principal balance little-by-little, so you end up saving money and owing less interest over the life of the loan.
Paying twice the prescribed amount on a 30-year mortgage will cut the term to just shy of 11 years (130 payments). Does making two smaller twice monthly mortgage payments really pay it off significantly faster?
What income is required for a 200k mortgage? To be approved for a $200,000 mortgage with a minimum down payment of 3.5 percent, you will need an approximate income of $62,000 annually.
This commonly used guideline states that you should spend no more than 28 percent of your income on your housing expenses, and no more than 36 percent on your total debt payments. If you're earning $100,000 per year, your average monthly (gross) income is $8,333. So, your mortgage payment should be $2,333 or less.
The 15-year mortgage has some advantages when compared to the 30-year, such as less overall interest paid, a lower interest rate, lower fees, and forced savings. There are, however, some disadvantages as well, such as higher monthly payments, less affordability, and less money going toward savings.