Do you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.
What is mortgage amortization?
Mortgage amortization is the reduction of debt by regular payments of principal and interest over a period of time. For example, if you make a monthly mortgage payment, a portion of that payment covers interest and a portion pays down your principal.
Typically, the majority of each payment at the beginning of the loan term pays for interest and a smaller amount pays down the principal balance. Assuming regular payments, more of each following payment pays down your principal. This reduction of debt over time is amortization.
How can making extra payments help?
When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you’ll pay. Even small additional principal payments can help.
Here are a few example scenarios with some estimated results for additional payments. Let’s say you have a 30-year fixed-rate mortgage for $200,000, with an interest rate of 4%. If you make your regular payments, your monthly mortgage principal and interest payment will be $955 for the life of the loan, for a total of $343,739 (of which $143,739 is interest). If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment. When you split your payments like this, you’re making the equivalent of 1 extra monthly payment a year (26 bi-weekly payments totals 13 monthly payments). This extra payment may be applied directly to your principal balance. Be sure to first check with your lender if this is an option for your loan.
Using the same example as above, if you make a payment of $477.50 every 2 weeks, instead of 1 monthly payment of $955, you could shorten your total loan term by more than 4 years and reduce the interest paid by more than $22,000.
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.
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FAQs
When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.
Does Wells Fargo apply extra payments to principal? ›
When you pay more than the total amount due, on or before the due date, the additional amount will pay down your principal balance and will be applied to your next payment due. You can pay your account up to 3 months in advance. Once the account is paid ahead 3 months, additional funds go toward principal only.
Does mortgage amortization change with extra payments? ›
Even a single extra payment made each year can reduce the amount of interest and shorten the amortization, as long as the payment goes toward the principal and not the interest. Just make sure your lender processes the payment this way.
How do you beat loan amortization? ›
3 Loan-Amortization Tips
- Add Extra Dollars to Your Monthly Payment. If your total mortgage loan is $100,000 and your fixed monthly payment is $500, add $100 or more to each monthly mortgage payment to pay down the loan more quickly. ...
- Make a Lump-Sum Payment. ...
- Make Bi-weekly Payments.
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.
How to pay off a 30 year mortgage in 5 to 7 years? ›
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.
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.
How to pay off a 250k mortgage in 5 years? ›
Increasing your monthly payments, making bi-weekly payments, and making extra principal payments can help accelerate mortgage payoff. Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster.
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.
What happens if I pay 3 extra mortgage payments a year? ›
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.
But if you have a relatively recent loan, you're likely looking at tens of thousands of dollars in savings and cutting as much as eight years off the life of your loan. Obviously, not everyone can afford to make two extra mortgage payments a year. You're basically increasing your housing costs by 16%.
What are the disadvantages of accelerated payments? ›
Although accelerated payments can be advantageous, depending on the terms of the loan, it may not be economical to take advantage of this option. Some lenders include prepayment penalty clauses in their loan contracts, which either limit or levy fees against accelerated payments beyond a specified limit.
Can amortization be written off? ›
The writing off of an intangible asset over its useful life is known as amortization expense, and the amount of an amortization expense write-off usually appears in the “depreciation and amortization” line item of the income statement.
How can you pay off an amortized loan quicker? ›
To pay off an amortized loan early, you can make payments more frequently or make principal-only payments. Since the interest is charged on the principal, making extra payments on the principal lowers the amount that can accrue interest.
What is the rule for loan amortization? ›
Starting in month one, take the total amount of the loan and multiply it by the interest rate on the loan. Then for a loan with monthly repayments, divide the result by 12 to get your monthly interest. Subtract the interest from the total monthly payment, and the remaining amount is what goes toward principal.
Why should you pay more on an amortized loan? ›
To pay off an amortized loan early, you can make payments more frequently or make principal-only payments. Since the interest is charged on the principal, making extra payments on the principal lowers the amount that can accrue interest.
Can you pay off an amortized loan early? ›
Paying off an amortizing loan early can save you from having to pay future interest. However, some lenders include an early payoff penalty in the loan contract since an early payoff will cause the lender to lose out on interest.
What happens if you make extra payments on your loan? ›
Extra payments toward your loan's principal (or the amount of the loan) can reduce the total amount you repay by reducing the total interest you pay. When you make extra payments, you can also reduce the loan's terms and pay your debt down faster. It can also lower the amount of your future monthly payments.
What happens if I pay $100 extra on my 15 year mortgage? ›
When you pay an extra $100 on your monthly mortgage payment, that entire amount goes to principal. You'll reduce your total balance much more quickly when you make an extra payment that goes directly to repaying your balance. You could cut around four years off your repayment time with just an extra $100 per month.
Do you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.