Do you make only the minimum mortgage payments each month? Did you know that you can make extra payments towards the principal when you can?
Many people aren’t aware that they have the option to make extra principal payments. You can do so as little or as much as you want. As long as you tell the lender where to apply the money, it will pay down your mortgage principal faster than just making minimum mortgage payments would.
Is it worth it though?
Paying Your Principal Down
Paying extra money toward your mortgage principal can help shave years off your mortgage balance. This means that you’ll pay interest for less time. It could add up to savings of thousands of dollars. This is true even if you only pay an extra $100 per month. You slowly but steadily knock the balance of your principal down which means that you pay less interest each month. You’ll also pay the loan off before its intended maturity date.
You have many ways that you can pay extra money toward your loan’s principal:
- Pay any extra amount each month (such as $100) – You can do this every month, once in a while, or as often as you like
- Pay an extra mortgage payment each year – You can choose a date and make that extra payment annually
- Pay 1/12th of your mortgage payment extra each month – This works out to be one extra mortgage payment each year
- Make biweekly payments – Divide your mortgage payment in half and pay it every other week; this will result in 13 monthly payments each year
Things to Consider First
Before you consider making extra payments toward your loan’s principal, you need to determine if you are in good enough financial shape to do so. Because interest rates on savings accounts and even CDs are so minimal today, it can make sense to put any ‘extra’ money you have toward your loan’s principal rather than earning measly interest rates.
But, if you don’t have extra money and have any of the following situations, you should wait:
- You have credit card debt – Any extra money you have that you were thinking of putting toward your loan’s principal should pay off your credit card debt. The interest charges you pay on your credit cards are much more than what you would earn by paying your mortgage off early. Get rid of those pesky interest charges and then you can make extra mortgage payments.
- You don’t have a savings account – You need an emergency account set aside for anything that could go wrong. You should have between 6 – 9 months’ of income in the account. This way if disaster strikes, you have the money to bail you out of it.
- You don’t contribute to your 401(K) – If your employer offers a 401(K) with matching contributions, you need to contribute. If you don’t, you basically give away ‘free money.’ Even if your lender only matches a portion of your contributions, it’s still more money than you had before.
So is it worth it to pay your mortgage off faster? It can be if you are in the right situation. If you have debt or don’t have proper savings/retirement accounts, then you may want to wait. Once you have yourself set up in a good financial situation, you can then start paying extra money toward your loan’s principal.Click to See the Latest Mortgage Rates»