Making extra mortgage payments could equal big savings for homeowners. Most homeowners are well aware of the fact that they’ll be making hefty payments for the next 30-years, or 15-years at the least if they are lucky enough to have a shorter mortgage.
Savvy homeowners make every attempt to make extra payments on the principle of their mortgage to shave years off this large financial burden. Making extra payments on your mortgage will cut down the overall length of the loan thus trimming the overall interest paid over the life of the loan. On a 15 or 30-year mortgage, this savings can amount to thousands of dollars.
The specifics of how much can be saved by making extra payments largely depends upon the size of the loan and the interest rate. To calculate your potential savings, plug your numbers into our What If I Pay More calculator. Below is a good example of how much can be saved with just a couple extra hundred dollars a month.
Making one extra payment on a 15-year, $300,000 mortgage with a 5% interest rate equals approximately $200 extra per month. By paying $2,572 each month instead of the required $2,372, you can cut the number of payments down from 180 to 161, from 15 years to just over 13 years. This equals a savings of $15,376 over the life of the 15-year mortgage. The higher the interest rate, the more you'll save by making extra payments.
While making extra mortgage payments can be a huge financial benefit over the long term, there are other payments you should be making before putting extra dollars towards your mortgage. For example, consider your credit card debt. If you have substantial credit card debt and are paying a high interest rate on that card, if makes more sense to pay off the credit card debt before starting to make extra mortgage payments. Also, it is vital to have an emergency fund to handle life’s unexpected expenses such as car repairs, home repairs, healthcare and family emergencies. Finally, make sure you are contributing to a retirement savings plan such as a 401(k). If you are in a situation where you have limited credit card debt, a few months worth of expenses in savings plus already contribute to a retirement savings plan, then yes, it does make sense to make extra payments on your mortgage.
To make extra payments easier, you may be able to set up automatic bi-monthly mortgage payments with your bank. Or, just submit your extra payment on the principal with each monthly mortgage payment and start watching your savings add up.
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