How to Save by ‘Overpaying’ Your Mortgage
When you make your monthly mortgage payment, whether you pay with a recurring withdrawal from your checking or savings account or send a check to your lender, you’ll have the option to pay an extra amount that your lender will apply directly to your loan’s principal balance.
This is a smart financial move
If your budget can handle the extra payment, this can benefit you in the long run. Even a small extra payment each month will add up. That’s because when you reduce your loan’s principal balance, you also reduce the amount you spend on interest during the life of your loan.
Your lender calculates the amount of interest you owe on your remaining principal balance. If you pay down that balance faster, your mortgage loan will generate less interest, saving you money over time.
Just make sure that you specify with your lender that you want your extra money to go toward paying down your principal balance. You don’t want your extra dollars to go toward building up your escrow account. And you don’t want your extra payment split between your principal balance and the interest that you owe.
How much can you save?
How much you’ll save in interest depends on the size of your mortgage, how much extra you pay and how often you make an extra payment. But the savings can be sizable even with a small extra investment each month.
Say you took out a 30-year, fixed-rate mortgage of $300,000 with an interest rate of 6.8%. If you have 25 years remaining on your mortgage and you pay $100 extra toward your principal balance each month, you’d reduce your mortgage’s term by two years and 10 months and you’d save $41,253 in interest.
If you have the same mortgage with 25 years left and you pay $200 extra toward your principal balance with each payment, you’ll reduce your mortgage’s term by five years and one month and save $71,792 in interest.
As you can see, even a relatively small extra payment can pay off big.
Should you do this?
Whether you should make extra principal payments depends on your financial situation. If you can comfortably afford the extra payment and aren’t burdened by other, more expensive debts, paying extra each month is a smart move.
But if your budget is already stretched thin, don’t stretch it even further by paying extra. And if you are burdened with high-interest-rate credit card debt, it makes more sense to devote any extra money each month to paying that off first.
The same is true if you are paying off student, personal or auto loans that come with higher interest rates. Paying those down before devoting extra payments to your mortgage is the smarter financial move. Financial professionals can help you make the right decision.
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