What Happens If You Make 3 Extra Mortgage Payments a Year?
Discover how making even a few extra mortgage payments each year can profoundly impact your financial future and home ownership.
Discover how making even a few extra mortgage payments each year can profoundly impact your financial future and home ownership.
Making extra payments on a mortgage can significantly reduce the total interest paid and shorten the loan term. Even small, consistent additional payments can have a substantial financial impact over the life of a mortgage. Understanding how these extra payments interact with the loan’s structure is key to maximizing their benefit.
A mortgage payment is composed of two parts: principal and interest. Principal is the amount borrowed, while interest is the cost charged by the lender. Early in the loan’s term, a larger portion of each monthly payment goes towards interest, with a smaller portion reducing the principal balance. This allocation gradually shifts over time, with more of each subsequent payment being applied to the principal.
This changing allocation is due to amortization. As the principal balance decreases, the amount of interest accrued on that balance also lessens. Any payment made above the scheduled amount, when designated correctly, goes directly to reduce the outstanding principal.
Reducing the principal balance ahead of schedule means interest is calculated on a smaller amount for all future payments. This accelerates the payoff process and lowers the total interest paid over the mortgage term. Homeowners can save thousands of dollars and shorten their loan duration.
Making three extra mortgage payments per year can reduce both the total interest paid and the overall loan term. For example, on a $300,000, 30-year fixed-rate mortgage at a 6% interest rate, three extra payments annually could reduce the loan term by 6-8 years, leading to interest savings of approximately $50,000 to $70,000.
Achieving three extra payments can be approached systematically. One common strategy is to convert monthly payments to bi-weekly payments. Making half of your monthly payment every two weeks results in 13 full monthly payments by year-end, generating one extra payment annually. To add two more payments, you can integrate additional principal contributions throughout the year, either as a lump sum or by adding a portion to each monthly payment.
Mortgage payoff calculators can help homeowners visualize these savings by inputting their specific loan details and proposed extra payment amounts. These tools provide an amortization schedule showing the impact on both the payoff date and the total interest. By understanding these calculations, homeowners can make informed decisions about their financial trajectory.
Implementing a strategy to make extra mortgage payments requires deliberate action and clear communication with your lender. The most effective way to ensure extra funds reduce your principal balance is to specifically designate them as “principal-only” payments. Without this designation, lenders might apply the extra money to future scheduled payments, which would not accelerate your payoff or reduce total interest.
Several practical methods can help you achieve the goal of three extra payments annually. Beyond the bi-weekly payment method which naturally yields one extra payment, consider rounding up your monthly payment to the next whole dollar amount or a round figure like an additional $50 or $100. For instance, if your payment is $1,798.65, paying $1,850 or $1,900 each month consistently adds to your principal over time.
Windfalls, such as tax refunds, annual bonuses, or inheritances, present excellent opportunities to make significant lump-sum principal payments. Budgeting a specific amount each month to be allocated directly to principal is another disciplined approach. Before making any extra payments, it is prudent to confirm with your mortgage servicer their specific procedures for applying additional funds to ensure they are directed to the principal.