Adding extra payments to your mortgage payment will lessen the whole amount paid and shorten the duration of the loan. One option for extra payments would be to make one extra mortgage payment every year. This plan might work if you get paid every 2 weeks and get paid 26 times a year or receive an annual bonus which you could use to produce an extra payment.
The payments on a mortgage are calculated to provide a level payment that fully pays off the loan if the last payment is made. Every payment is allocated to interest to the creditor and a reduction of the loan principal. The interest on each payment is based on the loan balance. Reducing the loan balance with extra principal payments reduces the entire interest paid and the time that it takes to pay back the mortgage.
The sum of money saved by creating additional mortgage payments is dependent on the interest rate of the loan and also the size of the loan. A mortgage calculator with an amortization function and the choice to include extra principal payments will compute the savings based on your mortgage rate and principal level. Mortgage calculators can be found online, or you can use a mortgage template to get a spreadsheet application like Microsoft Excel. Links to certain calculators are given in the Resources.
The outcomes of making an extra mortgage payment per year can be significant interest savings. By way of instance, a 30-year mortgage with an original principal amount of $250,000 and an interest rate of 6.5 percent has a principal and interest payment of $1,580. If you cover the mortgage in full, the entire interest you pay will amount to nearly $319,000. If you create an extra payment of $1,580 every year on the anniversary of the loan, the interest would be reduced for $249,000, a savings of $70,000. The duration of the mortgage could be shortened from 30 years to a bit over 24 years.
Making extra payments on your mortgage may also allow the equity in your house to grow faster and finally leave you with a free and clear home. In case you’ve got a financial goal of being debt free and owning your own house, making an extra payment on your mortgage every year will make you closer to the goal. Extra principal payments are the equivalent of long term investments earning interest at the rate of your mortgage.
Money paid for your mortgage business as extra principal payments is money that cannot be easily recovered. You have to sell the house or wait until the mortgage is paid off to realize the advantages of the extra payments. Obtaining off a mortgage early should be a part of a plan of financial freedom. You should have a savings reserve for financial emergencies, so the extra principal payments don’t become a hardship.