Why Make an Extra Mortgage Payment?
Considering the current state of the economy, many people are trying to pay down debt to unburden themselves financially. Have you considered paying down your home loan? Your mortgage is probably the biggest debt you will have in your lifetime; paying it off early will save you potentially thousands of dollars that you’ll keep in your pocket, to spend on vacations or college tuition, or to save for a rainy day.
If you’re interested in paying down your mortgage faster, you can make just one extra payment per month — or even just one extra payment over the life of the loan. You’ll be surprised at how much you can save!
Making a Difference
Here’s an example. Say you have a mortgage for $210,000. Your interest rate is 4% and your original monthly payments are about $1,003. If you make just one extra payment of $1,000 on your loan, just once, you’ll pay off your loan up to three months earlier, saving you all the interest you would have paid during that time.
Now here’s a more exciting example. Using the same loan parameters above, if you add $50 to every monthly payment, you’ll pay off your loan nearly two years ahead of schedule. Take a look at your loan statement; how much interest will you save now?
And another interesting tip: A single large payment early in the life of the loan will shorten your term and reduce your interest payments more than a contribution made later on, although any additional payment will show benefits.
Finding the Cash
If you get paid every two weeks, twice a year you’ll get an “extra” check. Consider putting those two checks directly toward your mortgage. Even taking half of them and paying down your loan will help reduce your loan term and the amount you owe.
If you decide to make just one extra payment a year, consider budgeting for it every month. An extra payment of $1,003 is $83.58 per month, or $19.29 per week. Committing to setting aside the cash on a regular basis can make it seem more manageable, especially if it means just skipping a couple of coffees and lunch out one day each week.
Is This the Right Choice for You?
Remember, however, that paying off a home mortgage loan may not be the best choice for everyone. If you have other loans, especially ones with higher interest rates than your mortgage, then they should probably be your priority to pay off. Credit cards and car loans usually have higher rates than home loans.
In addition, the government currently allows homeowners to write off mortgage interest payments on their taxes.* if you are seeing significant benefits from this credit on your tax returns, you may not want to pay off your home loan at this time.
Making a Decision
Paying off your mortgage, as you can see, is not a decision to be taken lightly. Be sure to review all your debts and the interest you’re paying.
* I am not a tax advisory firm. The information contained in this article is for informational purposes only and may not reflect current tax year rules and regulations. Consult your tax advisor or the IRS for current tax year rules, restrictions and regulations.