Whether you’re a first-time buyer or this is your second (or third) purchase in your lifetime, there’s a good chance that you’ve wondered about the best ways to save money over the life of your mortgage. According to some experts, making just one extra mortgage payment every year can help you pay off your house in half the time and save you tens of thousands of dollars in insurance costs. Here’s how it works.
Why Making Extra Payments Can Help
If you borrowed $120,000 at a 4.5% interest rate, every mortgage payment you make is split. Some of it goes toward paying off what’s left of the $120,000 – this is the principal balance – and some of it goes toward paying off the interest that accumulates as long as you carry an owed balance. The lesser the principal balance, the lesser the interest. That’s why making one extra payment a year can have a tremendous impact on both the overall life of the loan and the amount of interest you will pay.
However, even though making one extra payment can save you a great deal of money in the long run, there are other things to consider beforehand.
A Concrete Example
Using the above example, and assuming you have a 30-year fixed-rate mortgage, your minimum mortgage payment of $608.02 will result in interest charges of $98,888 over the life of the loan, and it will take you all 30 years to pay it off. If you make 13 payments of $608.02 a year instead of just 12, you will be able to pay off your mortgage in 25 years and nine months, and you will save $16,018 in interest charges over the life of the loan, too. Even better, if you can put an extra $100 toward your monthly payments every single month for the life of your mortgage, you can save a total of $27,944 in interest and pay off your 30-year mortgage in only 22 years and six months.
Should Everyone Make Extra Payments?
There are a few things to consider when it comes to making that extra mortgage payment every year. Before putting extra money into your mortgage, make sure that you are saving money for retirement and that your budget is not excruciatingly tight. You should have room in your budget to move money into savings every month. If you cannot do these things, making extra mortgage payments is not the best idea. If you have balances on high-interest credit cards or auto loans, it is better to put money toward these than your mortgage. It will help you save more money immediately.
Making an extra mortgage payment every year might be a good idea, but if you’re a first time buyer and your budget is tight, consider putting that money somewhere else, instead. Otherwise, the more you can pay above the minimum payment, whether monthly or annually, the sooner you will pay off your mortgage, but be aware that many people see better returns with stocks, bonds, mutual funds, and other investments.