What Happens If I Pay 2 Extra Mortgage Payments a Year?
Discover how strategically adding extra payments to your mortgage can significantly alter your loan's financial trajectory and duration.
A mortgage is a significant financial commitment, often spanning decades. The prospect of paying off this debt sooner than scheduled is a common financial aspiration. While regular monthly payments adhere to a fixed amortization schedule, making additional payments can significantly alter the trajectory of a mortgage. This involves dedicating more funds than required towards the outstanding loan balance.
Understanding How Extra Payments Work
A standard mortgage payment is comprised of two primary components: principal and interest. In the initial years of a loan, a larger portion of each payment is allocated to interest, with a smaller amount reducing the principal balance. This structure is due to the amortization schedule, which calculates interest on the current outstanding principal. As the loan matures, the proportion gradually shifts, with more of each payment going towards principal reduction.
When an extra payment is correctly applied, it directly reduces the loan’s principal balance. This reduces the principal upon which future interest calculations are based. By lowering the principal balance ahead of schedule, the borrower effectively shortens the period over which interest accrues on the original loan amount.
Shortening Your Loan Term
Making consistent extra payments on a mortgage directly impacts the loan’s duration. Each additional dollar applied to the principal balance reduces the total amount owed, effectively removing future scheduled payments. If a borrower consistently makes extra payments equivalent to two additional monthly payments per year, they accelerate the principal reduction process significantly. The entire loan amount will be paid off in fewer total months than originally planned.
For example, on a 30-year mortgage, consistently applying two extra payments annually can reduce the loan term by several years, potentially shortening it to 25 years or less, depending on the loan’s terms and interest rate. This accelerated payoff occurs because the principal balance declines faster, reaching zero sooner. The effect is cumulative, with each extra payment building on the previous one.
Reducing Total Interest Paid
Beyond shortening the loan term, a primary financial benefit of making extra mortgage payments is the reduction in the total interest paid over the loan’s life. Since interest is calculated on the outstanding principal balance, lowering this balance faster means less interest accrues over time. The earlier the principal is reduced, the greater the interest savings, as the effect compounds.
By making two extra payments each year, a borrower reduces the principal balance more quickly, thereby avoiding a large portion of the interest that would have accumulated on that principal in subsequent years. This action can translate into tens of thousands of dollars in saved interest over the full term of a 30-year loan. The cumulative impact of these consistent additional payments yields a substantial financial advantage.
Methods for Making Extra Payments
Making two extra mortgage payments annually can be achieved through several methods. One common approach is to divide one extra monthly payment by twelve and add that amount to each regular monthly payment. This results in 13 monthly payments annually without requiring large lump sums. Alternatively, a borrower might choose to make two full extra payments during the year, perhaps when receiving a bonus, tax refund, or other unexpected income.
Another popular method involves setting up bi-weekly payments. With this schedule, a borrower makes a half-payment every two weeks, resulting in 26 half-payments per year. This amounts to 13 full monthly payments annually, automatically creating one extra full payment. Regardless of the chosen method, confirm with the mortgage servicer that any additional funds are applied directly to the principal balance. Some lenders automatically apply extra funds this way, but others require specific instructions to prevent the payment from being held for future regular payments or applied to escrow.