What Happens If I Make One Extra Mortgage Payment?

Homeownership often involves managing a mortgage, a long-term financial commitment that shapes a household’s budget. Many homeowners consider options to reduce this debt more quickly than the standard payment schedule. Making an additional mortgage payment is one approach that can alter the trajectory of your home loan.

The Direct Impact on Your Mortgage

An extra mortgage payment, when applied correctly, directly targets your loan’s principal balance, which is the original amount borrowed excluding interest. Since interest on a mortgage is calculated based on the outstanding principal, reducing this balance directly lowers the amount of interest that accrues over time, meaning subsequent interest calculations are based on a smaller loan amount. This accelerated principal reduction has a compounding effect, leading to significant savings on interest over the life of the loan. For example, adding even a modest amount, such as $100 or $200, to your monthly payment, can shorten a 30-year mortgage term by several years and save tens of thousands of dollars in total interest paid. While your regular monthly payment amount typically remains the same, the extra payment ensures more of your money goes towards owning your home outright rather than paying financing charges.

Ways to Make Additional Payments

There are several practical methods homeowners can use to make extra mortgage payments.

Lump Sum Payments

One common approach is making a one-time lump sum payment, often from sources such as a tax refund, an annual bonus, or an inheritance. When making such a payment, it is important to clearly designate that the funds should be applied directly to the principal balance, rather than being held for future payments or applied to interest. This often requires communicating directly with your loan servicer through their online portal, by mail with specific instructions, or over the phone.

Bi-Weekly Payments

Another popular strategy involves setting up bi-weekly payments. Instead of making one full mortgage payment monthly, you pay half of your monthly amount every two weeks. Because there are 52 weeks in a year, this results in 26 half-payments, which is equivalent to 13 full monthly payments annually. This effectively adds one extra full payment to your principal each year, accelerating the loan payoff and reducing total interest. Before adopting this method, it is advisable to confirm with your lender that they process bi-weekly payments in a way that applies the extra funds directly to the principal.

Increased Monthly Payments

A simpler method is to increase your regular monthly payment by a fixed amount. This can be done by adding a small sum, such as one-twelfth of your typical monthly payment, to each installment. Over the course of a year, these small additions accumulate to an extra full payment towards your principal.

Evaluating Extra Payments Within Your Overall Finances

Considering an extra mortgage payment requires a comprehensive view of your overall financial standing. It is advisable to establish a robust emergency fund, typically three to six months’ worth of living expenses, before allocating significant extra funds to your mortgage, as this buffer provides security in case of unexpected events, preventing new debt. Comparing the interest rate on your mortgage to other outstanding debts is also important. Mortgage interest rates are typically lower than credit card interest rates because mortgages are secured by the home, making them less risky for lenders, while credit card debt is unsecured. Prioritizing the repayment of higher-interest debts, such as credit card balances, often yields greater immediate financial benefit.