How Making Extra Mortgage Payments Can Save You Money

Much Will I Save if I Make Extra Payments On My Mortgage?

Refinancing to get a lower rate will definitely help cut your mortgage payments, but small extra mortgage payments of principal after you refinance can help you pay off your loan faster than you might think.

Most borrowers start out with mortgages that have amortization terms of 30 years or more because they do not have the income level to support a 15 or 20 year fixed rate mortgage. Many borrowers hope to pay off their loan faster with extra payments of principal after they get settled into their home and used to their household expenses.

Mortgage amortization with extra payments:

Mortgage payments are based on an amortization schedule that assumes interest will be due on the principal of the mortgage over the entire 30 year period. Every time you make a principal payment ahead of schedule, the interest on that principal due for the remainder of the term is reduced by that amount. Instead of your monthly payment being reduced every time you make an extra payment to principal, the savings is taken off the back end of your loan payment schedule. This results in less loan payments. Your mortgage loan servicer will re-calculate your loan for you every time you make an extra payment to principal.

The effects of extra payments on mortgage:

The basic rule of thumb is that if you make the equivalent of one extra mortgage payment per year, then you will cut your loan payments from 30 to about 22.5 years. Note that this is just the mortgage principal and interest payment and does include any escrow payments for taxes or insurance. That is a reduction of more than 85 payments. More than one payment per year will cut your payments even further.

Extra mortgage payment alternatives:

The less common way to pay off your mortgage faster is to make a lump sum payment or a series of lump sum payments. When you make a large lump sum payment, you may have the option of reducing your loan payment to reflect the fact that a much lower principal amount is owed. Alternatively, you will just pay off your loan faster than scheduled.

Some borrowers utilize bi-weekly payment programs to make extra payments of principal. Under this plan, paying half of your mortgage payment every two weeks means that you will have accumulated one extra payment at the end of the year. That payment is then applied to your principal. The average bi-weekly mortgage program cuts the number of years required to pay off your mortgage loan from 30 to about 22.5, saving over 7 years of payments.

Bi-weekly payment program a good option:

The bi-weekly payment program is a good option for borrowers who are paid every two weeks, as it matches up with their pay schedule. The only drawback to this program is that there are monthly fees associated with the program that cut into your savings. Borrowers could save up the extra payment themselves each year and just send it to the mortgage lender, but often other expenses get in the way

To learn which extra payment schedule is best for your specific financial situation, complete a free rate quote request

To see the current mortgage rates, visit our Current Mortgage Rates page.

If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

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