How Making 1 Extra Mortgage Payment Could Shave Years Off Your Debt

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Editor's Note: This story originally appeared on The Penny Hoarder.

Thirty years is a long time. If you’re chipping away at a mortgage each month, it can feel even longer.

But what if you could eliminate that financial ball and chain by paying off your mortgage early?

The truth is, if you can scrape together the equivalent of one extra payment to put toward your mortgage each year, you’ll take — on average — four to six years off your loan.

You’ll also save tens of thousands of dollars in interest payments.

Paying off your mortgage faster and eliminating that outstanding loan balance can free up money in your budget — money you can put toward other goals.

We’ll break down exactly how it works, how much you can save and strategies you can use to squeeze an extra mortgage payment out of your budget.

How Paying on a Mortgage Works

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Most people can’t afford to buy a house outright in cash. Instead, you pay a percentage of the total cost, known as a down payment, and take out a loan for the rest. That’s your mortgage, and it’s typically paid back over 15 to 30 years.

Principal and interest are the main components of your mortgage payment. The principal is the original amount you borrowed and interest is what mortgage lenders charge for lending you the money.

Your regular monthly payment may also include private mortgage insurance (PMI), a fee that goes away once you’ve paid off 20% of the principal.

In the beginning, most of your monthly mortgage payment goes to interest because your loan balance is so high. Only a little goes toward paying off the loan principal.

Paying down the principal means you owe less interest each month because your loan balance shrinks.

How Extra Mortgage Payments Work

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Making extra mortgage payments — and applying them to the principal — reduces your principal balance little by little, so you end up saving money and owing less interest over the life of the loan.

And when you owe less interest, you can trim years off your mortgage term.

Additional principal payments also build home equity and help eliminate PMI faster.

The cost of PMI for a conventional home loan averages 0.58% to 1.86% of the original loan amount per year.

If you put a 5% down payment on a $350,000 30-year loan term, you could be paying $161 to $515 a month for PMI alone. The sooner you can get 20% of your principal paid off, the sooner you can eliminate this additional monthly cost.

Making 1 Extra Payment Can Save You Thousands of Dollars

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Curious how an additional payment can help you save money and pay off your mortgage early?

Consider this.

Let’s say you have a 30-year fixed-rate mortgage on a $350,000 home with a 6% interest rate. Your regular monthly payment is $2,098.

  • Pay-off date: December 2052
  • Total interest paid: $405,434
  • Total cost of the loan: $755,434

See how the total interest ends up costing more than the purchase price of the house? Ouch.

How an Extra Monthly Payment Adds Up

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If you make an extra monthly payment of $2,098 each December, you’ll pay off your 30-year mortgage five years ahead of schedule and net about $82,730 in interest savings in the process.

  • Pay-off date: September 2047
  • Total interest paid: $322,703
  • Total cost of the loan: $672,703

You read that right: $82,730 in interest savings.

Make Adjustments and Still Save

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But we realize that coughing up $2,098 around the holidays is tough.

So instead let’s imagine you increased your mortgage payment by 1/12th ($175) each month. With the same 6% interest rate, you’d end up paying $2,273 instead of $2,098.

The results are nearly identical, although making an extra mortgage payment at the end of the year saves you more money on interest.

  • Pay-off date: July 2047
  • Total interest paid: $319,441
  • Total cost of the loan: $669,441

As you can see, those extra monthly payments pay off. To figure out your own potential savings, use an amortization schedule calculator.

3 Ways to Make an Extra Mortgage Payment

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There are a few different ways you can make extra mortgage payments in a year.

No matter which method you choose, it’s important to tell your loan provider that you want the extra payment applied to your principal balance. Otherwise, extra payments might go toward the interest — which doesn’t help you pay off your mortgage faster.

1. Single Lump-Sum Payment

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Save up money throughout the year and put it in a special savings account. At the end of the year, empty the account to make your 13th monthly payment.

You can put extra money from tax refunds, bonuses at work or other unexpected income into the account to build it up faster.

Another option is setting up automatic recurring monthly deposits from your checking account to the savings account each month. This way, you’re not scrambling to come up with your bonus mortgage payment when December rolls around.

2. Add Extra Dollars to Your Monthly Payments

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Divide your monthly mortgage payment by 12 and add that amount to each month’s payment.

That extra amount should automatically get applied to your principal loan balance, but verify with your mortgage company just in case.

Paying a little above the minimum payment each month is easier for some people than making a lump-sum payment. And it still helps you pay off your mortgage early.

3. Biweekly Payments

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Some mortgage servicers let you sign up for biweekly mortgage payments. This lets you pay half your mortgage bill every two weeks instead of once a month.

Doing so results in 26 half-payments — or 13 full monthly payments — each calendar year.

Those additional payments toward your mortgage can save you major money in the long run.

Be aware that some lenders may charge extra fees if you opt for biweekly payments, while others may not offer this service at all.

Before You Start Making Extra Payments

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Before you start making extra mortgage payments, talk to your loan company.

Some lenders charge prepayment penalties if you pay your mortgage off ahead of schedule.

If your mortgage includes this clause, you can still repay your loan early, but you’ll need to save up extra money to offset the prepayment penalty amount.

It’s crucial to make sure any extra payments apply to your mortgage principal, too. Most companies give you this option online but you may want to call them to confirm that your extra cash is going to the right place.

Finally, make sure your finances are in good shape. You’ll need to examine your entire financial picture and determine if your dollars are better spent elsewhere.

Is being completely debt-free your top financial priority, or could your money be working for you in other ways?

Other Financial Considerations

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If the interest rate on your mortgage is low, it might be wiser to put extra money in your company’s 401(k) plan, save for a child’s college tuition or pay off other debts with higher interest rates, like credit cards and student loans.

You also need to maintain a healthy emergency fund, with enough money left over to cover your monthly expenses.

As long as you’re not neglecting other financial goals and your budget can afford it, making an extra payment each year is a smart way to pay off your mortgage early.

You won’t see the fruits of your labor right away, but your hard work will be worth it when you own your home free and clear years ahead of schedule.

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