Many people make extra payments on their mortgage each year, in an effort to prepay their mortgage, or to pay it off before the end of the anticipated loan term. Prepaying your mortgage can save you thousands of dollars, and even small payments now can quickly add up to dramatically shorter total loan lengths.
There are several different ways you can prepay your mortgage loan:
ü Paying bi-weekly instead of once a month
ü Making an extra payment at the end of the year
ü Rounding up your payment so you pay more than what’s due each month
ü Making an additional lump sum payment
ü Any combination of the above!
How much can I save by prepaying?
Since every loan is different, individual results will vary, but paying as little as just $25 extra per month on a $150,000 loan can shave off more than 3 years from your total loan term. What would you do with all the money you’ll save by paying off your mortgage faster? In order to find out exactly how additional payments will impact your mortgage, search for a mortgage amortization tool or calculator.
Are there downsides to prepaying?
There are certain downsides to paying your mortgage off early, so you’ll want to determine what makes the most sense for you, your family and your financial goals. You get to take a tax deduction each year based on the mortgage interest that you pay. The more you pay off your loan, the lower you’ll pay overall in mortgage interest and the lower your deduction will be come tax time. Additionally, with today’s historically low mortgage interest rates, you may be able to invest the money you would otherwise use to pay down your mortgage at a higher interest rate than you’re charged on your mortgage. For example, if you’re mortgage is at 4% interest, and you can reasonably assume to earn 7-8% interest investing your money, it may make more sense to invest versus paying off your mortgage early.
If you decide you want to make any additional payments over and above what you’re required to make each month, make sure you speak to your lender and find out what their rules are. Some lenders will apply any additional payment made straight to the principal amount owed, while others will apply it forward – to your next month’s payment. Make sure you understand how your additional payment will be applied, so that you get the results you are expecting and looking for.