A typical mortgage has a 30-year term, meaning you don't actually own your home until you've made payments for roughly a third of your life. So it makes perfect sense you might consider making some extra mortgage payments -- i.e., payments in addition to your required monthly payments -- a few times a year to try and shorten your sentence.
Most mortgage lenders will be happy to let you make extra payments. Modern mortgages rarely include prepayment penalties. But just because you're allowed to make extra payments doesn't mean it's the right move.
Here's a look at what happens when you make extra mortgage payments.
Designated early payments
Any mortgage payment you make over and above your regularly monthly payment will still be applied to the current month. They're considered to be extra payments and not early payments. In other words, making an extra payment in May doesn't mean you can pay less in June. You'll still be expected to make your regular June payment.
In most cases, if you want to prepay your mortgage payment for a future month, perhaps because you'll be on vacation, you'll need to contact your mortgage lender. It can specifically designate your additional payment as an early payment so it correctly applies to the next month.
Paying down your principal
The fact that extra payments count toward the current month is actually a good thing. It means those additional funds go entirely toward paying off your loan principal.
What many folks don't realize is that a big portion of your ordinary monthly mortgage payment actually goes to paying the interest fees (especially in the first few years). Since only a small portion of your payment goes to the principal, it can take years to make much progress.
Even one or two extra mortgage payments a year can help you make a much larger dent in your mortgage debt. This not only means you'll get rid of your mortgage faster; it also means you'll get rid of your mortgage more cheaply. A shorter loan = fewer payments = fewer interest fees.
You can -- but should you?
Alright, so we've seen what happens when you make extra payments. Now it's time to consider if it's actually a good idea. While there are certainly benefits to making extra payments, it might be the wrong move for some homeowners.
For instance, if you were lucky enough to pick up a mortgage when rates were at record lows -- they got down into the 2% to 3% range before they spiked again -- then making extra mortgage payments may not be the best use of your money. Instead, you should work on paying off other (read: higher interest) debts.
If you're debt free (good job!), that money could probably be better used in a retirement or brokerage account. Barring all that, even just putting that money in a high-yield savings account could provide double the return on your investment than you'd get from extra payments on a low-interest mortgage loan.
That being said, if your mortgage has a higher interest rate -- current rates are over 6% -- well, then that could be a different story. You'll be hard-pressed to get a 6% return on a savings account, so it could be beneficial to make a principal-only payment a few times a year.
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FAQs
Any mortgage payment you make over and above your regularly monthly payment will still be applied to the current month. They're considered to be extra payments and not early payments. In other words, making an extra payment in May doesn't mean you can pay less in June.
What happens if I make extra payments on my mortgage? ›
Paying a little extra towards your mortgage can go a long way. Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you'll pay.
How many years does one extra mortgage payment take off? ›
No matter how much extra you pay each month, that amount can help shorten the life of your loan. Even making one extra mortgage payment each year on a 30-year mortgage could shorten the life of your loan by four to five years.
How do you pay off a 30 year mortgage in 15 years? ›
Options to pay off your mortgage faster include:
Pay extra each month. Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
What happens if I pay an extra $1000 a month on my mortgage principal? ›
When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).
What happens if I pay an extra $200 a month on my mortgage? ›
When you pay extra on a mortgage, you're paying above and beyond the regular monthly installment. The money you send is meant to apply directly to the loan principal, not the interest. This allows you to pay down your loan sooner and save money on interest.
How to pay off a 250k mortgage in 5 years? ›
There are some easy steps to follow to make your mortgage disappear in five years or so.
- Setting a Target Date. ...
- Making a Higher Down Payment. ...
- Choosing a Shorter Home Loan Term. ...
- Making Larger or More Frequent Payments. ...
- Spending Less on Other Things. ...
- Increasing Income.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
What happens if I pay an extra $1200 a month on my mortgage? ›
As you may know, making extra payments on your mortgage does NOT lower your monthly payment. Additional payments to the principal just help to shorten the length of the loan (since your payment is fixed).
What happens if I pay $500 extra a month on my mortgage? ›
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
You might think twice about applying additional funds to pay off your home early since doing so could deplete your liquidity. The extra money you dedicate to your house is locked in a non-liquid asset. If you need funds quickly, selling your property and accessing your money could take a long time.
What is the average age people pay off their mortgage? ›
But with nearly two-thirds of retirement-age Americans having paid off their mortgages, it means that the average age they have gotten rid of that debt is likely in their early 60s. Stats from 538.com, for example, suggest the age is around 63.
How to shave years off a mortgage? ›
Here are some ways you can pay off your mortgage faster:
- Refinance your mortgage. ...
- Make extra mortgage payments. ...
- Make one extra mortgage payment each year. ...
- Round up your mortgage payments. ...
- Try the dollar-a-month plan. ...
- Use unexpected income. ...
- Benefits of paying mortgage off early.
Payments made on a mortgage in addition to your regular monthly payment will count toward the loan principal. Extra payments can be beneficial because they apply directly to your loan principal, helping you pay off your loan faster and with fewer interest fees.
Is it smart to pay extra on a mortgage? ›
Making extra mortgage payments can help reduce interest as well as the term of your loan.
What happens if I pay an extra $600 a month on my mortgage principal? ›
Making extra monthly payments toward your mortgage principal can save you a substantial amount of interest over the long term. It can also allow you to pay off your mortgage in full much faster. However, before adding to your mortgage payments, consider paying down any of your high-interest credit card debt.
Is making extra mortgage payments worth it? ›
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
What happens if I overpay my mortgage every month? ›
Once you've made an overpayment, you can't get a refund – and remember that you'll need to make your monthly payments as usual. Every overpayment you make means you pay less interest overall on the money you borrowed from us.
How much extra can I pay on my mortgage without penalty? ›
What's a closed mortgage? You can't prepay, renegotiate or refinance a closed mortgage before the end of the term without a prepayment charge. But, most closed mortgages have certain prepayment privileges, such as the right to prepay 10% to 20% of the original principal amount each year, without a prepayment charge.
