How can paying extra money save you money?
Now is a good time to think about the benefits of paying extra on your mortgage principal. It’s a smart move because the faster your loan is paid off means you will pay less in interest—reducing your overall loan cost.
Making additional payments on your mortgage does not lower you monthly payment. But early pay off saves you money because the loan term is shortened. This allows you to stop paying a mortgage sooner than if you made the minimum payment for the life of the loan.
If you make an extra payment, it may go toward fees and interest first. So, it’s important to designate an additional payment toward the loan as a principal-only payment, which means money goes directly toward your principal.
What are some advantages to paying off your mortgage early?
- Free up cash flow
- Pay less in interest
- Stop paying private mortgage insurance
If you have a 30-year mortgage and are determined to pay off your loan earlier, then pay whatever extra you can toward the principal. Even paying $20 or $50 extra each month can help pay down your mortgage faster.
Here is an example loan scenario: Loan amount: $300,000 Interest rate: 4.75% Term: 30 years
The table below shows an example on a 30-year mortgage loan. If you pay $50 extra per month, your loan will be paid off 23 months early, saving you $19,997.02 in interest payments.
Original Loan Schedule Pay Extra $50 Month Total Interest Savings Monthly Payments $1,564.94 $1,614.94 - Total Payments $563,379.12 $543,382.10 - Total Interest $263,379.12 $243,382.10 $19,997.02
The right payment strategy for you will depend on your financial situation. But do your homework and ask your mortgage lender if there’s a prepayment penalty associated with your loan. Usually, homeowners can pay off their mortgage early by following ground rules and confirming their loan terms.