If you’re a homeowner, you may be looking for ways to reduce your mortgage payment or shorten the length of your loan. There’s a simple strategy that could potentially save you hundreds of thousands of dollars over the life of your mortgage: making one extra mortgage payment per year. Here’s how it works and why it’s a game changer for your finances.
The Power of One Extra Mortgage Payment
Let’s break it down with an example. Imagine you have a $400,000 mortgage with a 30-year term at a 6.5% interest rate. Your monthly mortgage payment would be about $2,528.
Now, by making one additional mortgage payment each year—whether as a lump sum or spread out over 12 months—you could cut your loan by 6.5 years and save a staggering $111,202 in interest.
How to Make an Extra Mortgage Payment
There are a couple of ways to make that extra payment:
1. One Lump Sum Payment: You could simply make one full additional mortgage payment at any time during the year.
2. Spread It Out: Alternatively, you could divide your extra payment across the year. For example, you could increase your monthly mortgage payment by $210, so that over the course of the year, you’ve made the equivalent of one extra payment.
Why Does This Save So Much Money?
When you make an extra payment, that payment goes directly toward the principal balance of your loan. By reducing the principal faster, you end up paying less interest over time. It’s a simple, yet highly effective way to minimize your mortgage costs without refinancing or making dramatic financial changes.
Is It Right for You?
Before jumping in, check with your lender to ensure there are no prepayment penalties. Most loans allow extra payments without penalties, but it’s always good to confirm.
Conclusion
Making an extra mortgage payment may sound small, but it can make a massive difference in the long run. By shortening your loan term and reducing the amount of interest paid, this simple tactic can help you achieve financial freedom faster.
If you have any questions you can always contact us! We would love to chat with you.