This approach helps homeowners pay off their mortgages faster and reduce their total interest costs over the life of the loan. Making just one additional monthly payment, for example, can make a significant difference in the amount of interest you pay and the length of time it takes to pay off your mortgage.
In general, making extra payments involves adding money to your monthly mortgage payments or making a lump sum payment when possible. By paying down your loan balance in a more accelerated fashion, you can save substantially on the amount of interest you pay over the life of the loan.
When considering extra payments to save money, it’s important to understand how mortgage loans work. Most mortgage loans are amortized loans, meaning that a predetermined amount of principal and interest is paid each month until the loan is paid off. Additional payments are applied to the principal balance of the loan in order to reduce the total amount of interest that will be paid over the life of the loan.
Extra payments can be made in various ways. Homeowners can adjust the payment frequency from monthly to biweekly or even weekly, as this can have a significant effect on the total amount of interest paid over the life of the loan. For example, making one extra payment per year will reduce the life of the loan by almost 10 years and reduce the total amount of interest by approximately 70%.
Alternatively, borrowers can make a lump sum payment annually, such as from tax refunds or other sources of income. This amount can be applied directly to the loan’s principal balance, which can significantly reduce the total amount of interest paid over the life of the loan.
It’s important to keep in mind that not all lenders allow borrowers to make extra payments without incurring a penalty. If you plan on making extra payments, it’s best to check with your lender first and determine if there are any restrictions. The good news is that some lenders do offer discounts for making additional payments, so it’s always worth asking.
In conclusion, making extra payments can be a great way to shorten the life of your mortgage and reduce the amount of interest paid over the life of the loan. Adjusting the payment frequency and making lump sum payments make the biggest impact on total savings, but it’s important to contact a lender prior to making extra payments to determine if there are any restrictions or fees associated with them.
This article was contributed on Jul 01, 2023
