How Extra Payments Work

Making extra payments on your mortgage can accelerate the payoff process. When you make an additional payment, it goes directly toward reducing your principal balance. Since interest is calculated based on your remaining principal, a lower principal means less interest over time.

For example, adding just $200 per month to a 30-year, $250,000 mortgage at 4.5% interest can shave nearly 10 years off your loan term and save you over $50,000 in interest.

Strategies to Pay Off Your Mortgage Faster

• Make Biweekly Payments: Instead of monthly payments, split your payment in half and pay every two weeks. This results in 26 half-payments per year, which equals 13 full payments. This simple change can shorten your loan term by several years.
• Round Up Payments: Increase your monthly payment to the nearest hundred or thousand. For example, if your payment is $1,266, round it up to $1,300. The extra $34 per month adds up over time.
• Make Lump Sum Payments: Apply any windfalls, such as tax refunds, work bonuses, or inheritances, directly to your mortgage principal.
• Refinance to a Shorter Term: If interest rates drop or your financial situation improves, consider refinancing from a 30-year to a 15-year mortgage. The interest rate is typically lower, and you'll build equity faster.

Benefits of Paying Off Your Mortgage Early

• Interest Savings: The longer your mortgage term, the more interest you pay. Paying off your mortgage early can save you tens or even hundreds of thousands of dollars in interest.
• Financial Freedom: Owning your home outright eliminates a major monthly expense, freeing up cash for retirement, travel, or other goals.
• Equity Building: Your home equity is a valuable asset. Paying off your mortgage early builds equity faster, which can be tapped through a home equity loan or line of credit if needed.
• Peace of Mind: There's no denying the psychological benefit of knowing your home is fully paid for and not subject to market fluctuations or economic downturns.

Factors to Consider

Before making extra mortgage payments, consider your overall financial situation. Ensure you have an emergency fund, are contributing to retirement accounts, and have no high-interest debt (such as credit card balances).

Additionally, check your mortgage terms for prepayment penalties. Most modern mortgages don't have them, but it's important to confirm before making extra payments.