It’s important to understand that there are many factors that affect how long it takes you to pay off your mortgage. Even if you make biweekly payments and increase your monthly payment amount, there’s still no guarantee that you will be able to pay off your loan early. You should also consider other factors such as interest rate and balance on the loan before making any major decisions about paying off your mortgage faster.
In this guide, we find out: Can You Pay Off Mortgage Faster, what happens if i pay 2 extra mortgage payments a year, how to pay off mortgage faster, and should you pay off your mortgage as fast as possible.
Can You Pay Off Mortgage Faster
When we talk about being debt-free, we often assume that means having no debt whatsoever. But if you have a mortgage, that’s not necessarily true.
You may be able to pay off your loan faster than you thought possible—and save thousands of dollars in interest along the way.
Making biweekly instead of monthly mortgage payments is one way to pay off your loan earlier.
- The biweekly payment schedule allows you to pay the same amount of money over 26 weeks instead of 12.
- You can make a one-time payment to your mortgage lender, which will be credited toward the next month’s principal and interest payments due.
- If your lender allows it, you can refinance your mortgage in order to lower its cost and shorten the term.
A lump sum payment
If you’ve got the cash to spare, paying off your mortgage faster can be as simple as making one big payment.
For example, if you have $10,000 in your emergency fund and want to pay down your mortgage by $5,000 in a single year (the average cost of a home in Canada), it would take 5 years and 6 months. But if you were willing to put that $10K toward your loan principal instead of saving it for emergencies, then it would only take 2 years and 3 months. This is because once you’ve made that first lump sum payment, there’s no interest accumulating on the remaining balance; the debt just shrinks over time with each monthly instalment until eventually reaching zero.
A higher monthly payment
The best way to pay off your mortgage faster is to increase the amount that you pay toward the principal—that is, the part of the loan balance that doesn’t include interest. The simplest way to do this is by making a higher monthly payment.
For example, if your current mortgage payment is $900 per month, you could make an additional payment every year by adding $100 to each monthly payment. This would add up to an extra $1,200 in interest savings over 30 years at today’s rates (3 percent). If you have an extra $700 from some other source (like a job bonus or inheritance), give yourself a raise and increase that amount instead of taking out another loan for home improvements or emergencies!
If increasing your monthly payments isn’t possible or desirable for whatever reason—maybe it would mean selling one of your kids into slavery—then there are other options for saving money on interest charges:
Refinance your mortgage
If you can get a lower interest rate, shorter term or both, refinancing may be an option for you. Many banks and mortgage companies offer special incentives to refinance your mortgage at this stage of life. If you have been paying on your home loan for several years and have little equity in it, refinancing might make sense because you can reduce the total amount of interest paid over time.
The main thing to consider is whether or not refinancing will save money over the long run—and the answer depends on several factors:
- How long are you planning to stay in your home?
- How much do you expect property values to increase during that period?
- What current rates are available now and what rates did they run at when they were last offered?
You can pay off a mortgage faster by making biweekly payments, a one-time payment or by refinancing.
You can pay off a mortgage faster by making biweekly payments, a one-time payment or by refinancing.
Biweekly payments are simply half of your monthly payment made every two weeks instead of once a month. Let’s say you make $1,500 in monthly mortgage payments. If you make biweekly payments, you’ll make an extra $750 each year and pay the same amount per quarter (three months). However, since this is being taken out more often than usual and paid at the end of each period instead of all at once after three months like traditional monthly payments, it’s called “accelerated” because it increases the speed at which you’re paying off your debt.
One-time payment refers to paying off an entire loan balance in one lump sum rather than over time as with regular installments (monthly or yearly amounts). It could be that someone receives some money from selling something such as their house or even winning the lottery; whatever their means for having more funds available than usual would allow them to use those funds toward paying down debt instead of saving up for retirement or other savings goals they may have had previously set up with their bank account(s).
Refinancing involves taking out another mortgage (usually under better terms) in order to reduce current interest rates and increase monthly cash flow so that extra money can be applied toward paying off existing mortgages faster without incurring penalties from lenders who may not agree with refinancing without permission beforehand.
what happens if i pay 2 extra mortgage payments a year
Your mortgage is likely your largest expense, and you probably aren’t looking forward to paying it off for the next 30 years. But by making just two extra payments per year, you can be free from your mortgage significantly faster and save tens of thousands of dollars in interest. Here’s how it works.
If you find yourself with extra income, paying off your debts can be a rewarding and profitable enterprise. The higher the interest rate on your loans, the more money you stand to gain by clearing the debt quickly.
The mortgage on your home likely has a relatively low-interest rate, but the principal is so high and the loan term so long that you’ll end up paying tens of thousands of dollars in interest over its lifetime.
If you can afford more than the minimum monthly payment, you can diminish the accumulation of interest on your mortgage and reap significant savings. In addition, making extra payments will allow you to pay off your loan a lot faster — so you can start living debt-free as soon as possible.
How 2 Extra Payments a Year Can Save You $56,000
There are lots of ways to prepay a mortgage — lump sum injections, biweekly payments, and formal refinancing, to name a few. For simplicity’s sake, this example spreads the addition of 2 extra mortgage payments per year onto 12 standard monthly payments.
Let’s say you purchase a home for $250,000 and put 20% down. That translates to a mortgage principal of $200,000, which in this example will be paid off over a 30-year term at a 5% interest rate. If you make monthly mortgage payments of $1,073.64, after 30 years you’ll have paid down the principal as well as an additional $186,511.57 in interest.
But look what happens when you add 2 extra monthly payments per year, starting in year one. This is equivalent to 12 slightly-higher monthly payments of $1,252.85 — but this small difference is enough to pay off your full debt in just 22 years and cost you only $129,712.85 in interest.
In other words: two extra mortgage payments per year will save you eight years and $56,798.72 in interest.
Of course, you don’t have to put in exactly this amount every year to save money. The following chart shows how much you would save on this particular mortgage by adding different amounts to each of your monthly payments:
So, Should You Prepay Your Mortgage?
As you can see, it doesn’t take a lot to save extra money on your mortgage. Adding just ten dollars to your monthly payments — the cost of a Netflix subscription — will save you almost $5,000 over 30 years. And the more you add, the more you save.
The math doesn’t lie: paying off your mortgage at an even moderately accelerated schedule can save you thousands of dollars in interest. These savings are a guaranteed return that offers peace of mind and increased equity in your most important asset — your home.
However, if you have the surplus income to be making extra payments, you may want to consider other investment options as well. You might decide that investing extra cash is worth more than saving on mortgage interest, even if the savings are considerable. Also, note that your lender may have special restrictions or fines when it comes to prepaying your mortgage — so you want to really understand the terms of your loan before making a decision.
If you think extra mortgage payments could make sense for your financial situation, consult with a Clever Partner Agent who can offer personalized advice and help you better understand your options.
how to pay off mortgage faster
Paying off your mortgage early can help save thousands of dollars in interest. But before you start throwing a lot of money in that direction, you’ll need to consider a few factors to determine whether it’s a smart option.
In this article, we’ll share some of the pros and cons of paying off your mortgage early – and give you a few tips you can use to reduce the interest you’ll pay on your loan.
In this article, we’ll share some of the pros and cons of paying off your mortgage early – and give you a few tips you can use to reduce the interest you’ll pay on your loan.
Overview: Paying Off Your Mortgage Early
Every time you make a mortgage payment, it’s split between your principal and your interest. Most of your payment goes toward interest during the first few years of your loan. You owe less in interest as you pay down your principal, which is the amount of money you originally borrowed. At the end of your loan, a much larger percentage of your payment goes toward principal.
You can apply extra payments directly to the principal balance of your mortgage. Making additional principal payments reduces the amount of money you’ll pay interest on – before it can accrue. This can knock years off your mortgage term and save you thousands of dollars.
Let’s say you borrow $150,000 to buy a home at 4% interest with a 30-year term. By the time you pay off your loan, you’ll have paid a whopping $107,804.26 in interest. This is in addition to the $150,000 you initially borrowed.
Now, let’s say that you pay an extra $100 every month toward a loan with the exact same term, principal and interest rate. At the end of the term, you’ll have paid $82,598.49 total in interest. That’s $25,205.77 less than you would have paid if you didn’t make any extra payments. You’ll also pay your loan off 74 months earlier than you would if you only paid your premium each month.
Paying down your mortgage early reduces the amount that you’ll pay over time, but finance experts don’t agree that you should always focus on paying your loan off as soon as possible. Some believe that the average American should concentrate on investing rather than paying off their mortgage early, putting that extra money into a retirement account or an investment fund. Others believe that it’s better to use the money that would have gone to extra payments to pay down other sources of debt.
The decision to pay off your mortgage early is a personal one that depends heavily upon your individual circumstances.
Paying Off Your Mortgage Early: Is It Worth It?
If you find yourself with a little extra cash at the end of the month, should you put it toward your mortgage loan or refinance to a shorter term? There’s no simple “yes” or “no” answer. There are both risks and benefits to paying off your loan early or switching loan terms, and the right decision will be different for everyone. In this section, we’ll look at a few instances in which it makes sense to pay off your mortgage early – and when it doesn’t.