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- What Happens If I Pay 2 Extra Mortgage Payments a Year? An Expert Analysis
Dana Hendrix
As a mortgage professional with years of experience, one of the most common questions I hear from homeowners is: “What happens if I pay 2 extra mortgage payments a year?” It’s an excellent question, as this strategy can significantly impact your mortgage and long-term financial health. Let’s take an expert look at what making those extra payments can do for you.
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Check if you qualify for a mortgage by requesting a callback from one of our Loan Officers.
The Short Answer
Making 2 extra mortgage payments a year can lead to substantial savings on interest and help you pay off your mortgage years earlier. However, the exact impact depends on a few different factors, including your loan terms, interest rate, and how early in the loan term you start making additional payments.
Breaking Down the Impact
Let’s look into the effects of making an extra mortgage payment twice annually using a practical example:
Assume you have a $300,000 30-year fixed-rate mortgage at 4% interest. Your regular monthly payment (principal and interest) would be about $1,432.
1. Faster Loan Payoff
By making 2 additional principal payments each year, you’ll pay off your loan significantly faster:
- Without extra payments: 30 years
- With 2 extra payments per year: About 24 years and 7 months.
That’s a reduction of approximately 5 years and 5 months!
2. Interest Savings
The interest savings over the life of the loan are substantial and can help you save money:
- Total interest paid without extra payments: About $215,609
- Total interest paid with 2 extra payments per year: About $169,687.
You’ll save approximately $45,922 in interest over the life of the loan!
3. Building Equity Faster
Extra payments go directly toward your principal balance, helping you build equity in your home more quickly. In the first 5 years alone:
- Equity built without extra payments: About $32,746
- Equity built with 2 extra payments per year: About $48,864.
That’s an additional $16,118 in equity in just the first 5 years!
Strategies for Making 2 Extra Mortgage Payments a Year
In my years advising homeowners, I’ve seen several effective strategies for making those 2 extra payments:
- Biweekly Payments: Instead of making 12 monthly mortgage payments, make half your mortgage payment every 2 weeks. This results in 26 half-payments, or 13 full payments per year.
- Lump Sum Payments: Use tax refunds, bonuses, or other windfalls to make a lump sum payment towards your mortgage. This can significantly reduce the principal amount and save money over the life of the loan.
- Round Up Payments: Round your monthly payment up to the nearest hundred (or more if you can afford it).
- Allocate Raises: If you receive a salary increase, allocate that extra amount to your mortgage payment.
Pro Tip: Always specify that extra payments should be applied to the principal, not future interest.
Considerations before Making 2 Extra Mortgage Payments a Year
While making an extra payment towards your mortgage can be beneficial, it’s not always the best financial move for everyone. Here are some factors to consider:
- Prepayment Penalties: Some mortgages have prepayment penalties. In my experience, these are rare on newer loans but always check your loan terms.
- High-Interest Debt: If you have high-interest debt (like credit cards), it’s usually better to pay that off first.
- Emergency Fund: Ensure you have an adequate emergency fund before making extra mortgage payments.
- Investment Opportunities: In some cases, investing extra funds might yield better returns than paying down a low-interest mortgage.
- Tax Implications: Mortgage interest is tax-deductible for many homeowners. Making extra payments reduces this deduction, which might affect your tax situation.
Is Making Extra Payments Right for You?
Making 2 extra mortgage payments a year can lead to significant savings and help you become mortgage-free sooner. However, it’s crucial to consider your overall financial picture before implementing this strategy.
In my years as a mortgage professional, I’ve seen this approach work wonders for many homeowners, but it’s not a one-size-fits-all solution. Your decision should be based on your financial goals, current financial situation, and long-term plans.
If you’re considering making extra mortgage payments, I recommend consulting with a financial advisor or an experienced mortgage professional. They can help you run the numbers specific to your situation and determine if this strategy aligns with your overall financial objectives.
Remember, the key to financial success is making informed decisions that work best for your unique circ*mstances. Whether you decide to make extra payments or not, understanding your mortgage and actively managing it is a crucial step toward long-term financial health.
How much will your mortgage be? You can use DSLD Mortgage’s Mortgage Calculator to estimate your monthly mortgage payment.
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Mortgage FAQs
Homeownership is exciting, but it’s natural to have questions. I’m here to shed some light on some of the most common mortgage inquiries I get asked about making 2 extra mortgage payments a year so that you can make more informed decisions.
Making extra mortgage payments can significantly reduce the total interest paid over the life of the loan and shorten the loan term.
The savings depend on your loan amount, interest rate, and the timing of the extra payments. Generally, it can save thousands of dollars in interest and shave years off your mortgage.
Extra payments are typically applied to the principal balance of the loan, which directly reduces the outstanding debt and interest costs over time.
Making extra payments on your mortgage does not directly impact your credit score. However, maintaining a consistent payment history can positively affect your credit over time.
Article Resources
- Investopedia. “Principal: Definition in Loans, Bonds, Investments, and Transactions” May 09, 2024
- Bankrate. “What is a prepayment penalty?” August 14, 2024
- Experian. “How Much Money Should You Have in Your Emergency Fund?” September 14, 2023
- CNBC. “How to claim the mortgage interest deduction on your taxes” July 15, 2024.
About the author
Dana Hendrix
Dana Hendrix is the Senior VP of Finance at DSLD Mortgage, leading financial operations and compliance. He is a CPA with 5+ years' of expertise in strategic planning and empowering individuals and organizations to achieve their financial goals.
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