A typical mortgage has a 30-year term, meaning you don't actually own your home until you've made payments for roughly a third of your life. So it makes perfect sense you might consider making some extra mortgage payments -- i.e., payments in addition to your required monthly payments -- a few times a year to try and shorten your sentence.
Most mortgage lenders will be happy to let you make extra payments. Modern mortgages rarely include prepayment penalties. But just because you're allowed to make extra payments doesn't mean it's the right move.
Here's a look at what happens when you make extra mortgage payments.
Designated early payments
Any mortgage payment you make over and above your regularly monthly payment will still be applied to the current month. They're considered to be extra payments and not early payments. In other words, making an extra payment in May doesn't mean you can pay less in June. You'll still be expected to make your regular June payment.
In most cases, if you want to prepay your mortgage payment for a future month, perhaps because you'll be on vacation, you'll need to contact your mortgage lender. It can specifically designate your additional payment as an early payment so it correctly applies to the next month.
Paying down your principal
The fact that extra payments count toward the current month is actually a good thing. It means those additional funds go entirely toward paying off your loan principal.
What many folks don't realize is that a big portion of your ordinary monthly mortgage payment actually goes to paying the interest fees (especially in the first few years). Since only a small portion of your payment goes to the principal, it can take years to make much progress.
Even one or two extra mortgage payments a year can help you make a much larger dent in your mortgage debt. This not only means you'll get rid of your mortgage faster; it also means you'll get rid of your mortgage more cheaply. A shorter loan = fewer payments = fewer interest fees.
You can -- but should you?
Alright, so we've seen what happens when you make extra payments. Now it's time to consider if it's actually a good idea. While there are certainly benefits to making extra payments, it might be the wrong move for some homeowners.
For instance, if you were lucky enough to pick up a mortgage when rates were at record lows -- they got down into the 2% to 3% range before they spiked again -- then making extra mortgage payments may not be the best use of your money. Instead, you should work on paying off other (read: higher interest) debts.
If you're debt free (good job!), that money could probably be better used in a retirement or brokerage account. Barring all that, even just putting that money in a high-yield savings account could provide double the return on your investment than you'd get from extra payments on a low-interest mortgage loan.
That being said, if your mortgage has a higher interest rate -- current rates are over 6% -- well, then that could be a different story. You'll be hard-pressed to get a 6% return on a savings account, so it could be beneficial to make a principal-only payment a few times a year.
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FAQs
Save on interest
What happens if I pay 3 extra mortgage payments a year? ›
Paying a little extra towards your mortgage can go a long way. Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you'll pay.
What happens if I pay an extra $1000 a month on my mortgage principal? ›
When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).
How do I pay off a 30 year mortgage in 15 years? ›
Options to pay off your mortgage faster include:
Pay extra each month. Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
What happens if I pay an extra $500 a month on my mortgage principal? ›
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. NMLS ID 13649(Link opens in a new tab). PrimeLending is not affiliated with other mentioned companies.
How many years will a 2 extra mortgage payment take off? ›
But if you have a relatively recent loan, you're likely looking at tens of thousands of dollars in savings and cutting as much as eight years off the life of your loan. Obviously, not everyone can afford to make two extra mortgage payments a year. You're basically increasing your housing costs by 16%.
What happens if I pay an extra $2 000 a month on my mortgage? ›
The extra payments will allow you to pay off your remaining loan balance 3 years earlier. Because you will pay off your loan sooner, you will save $51,216.68 in interest over the life of the loan.
Is it better to pay lump-sum off mortgage or extra monthly? ›
Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.
Do extra mortgage payments go towards the principal? ›
Generally, national banks will allow you to pay additional funds towards the principal balance of your loan. However, you should review your loan agreement or contact your bank to find out their specific process for doing so.
Is there a best time within the month to make an extra payment to principal? ›
Rather than delaying credit until the next month, the optimal day within the month to make an extra payment is the last day on which the lender will credit you for the current month.
Pay extra each month
Let's say you have a 30-year mortgage at 5.5% and owe $300,000 on your home. Your principal and interest payment runs around $1,700 per month. By applying an extra $250 per month toward the principal, you'll shave seven years and nine months from the time it takes to pay the loan in full.
Is there a downside to paying off a mortgage early? ›
If you pay off your mortgage early, you'll no longer have any mortgage interest to deduct on your tax return if you itemize your deductions. This change is most likely to affect you if you have a large mortgage, a high interest rate—or both—-and your annual interest payments are substantial.
At what age should you pay off your mortgage? ›
To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
What happens if you miss 3 mortgage payments? ›
Lenders may vary on what they consider to be a mortgage going into default. In most cases, a lender will not send a homeowner a notice of default until the loan is 90 days past due or there have been three missed mortgage payments. Some lenders will wait longer, while others may send a default notice sooner.
How much extra can I pay off my mortgage each year? ›
Typically you're only allowed to overpay by 10% of your outstanding mortgage balance per year, so bear this in mind in particular if you wish to make recurring overpayments more than once a year.
Is there a limit on extra mortgage payments? ›
Additional payments
You can pay more toward your loan principal at any time, with any amount. Some borrowers do this with windfalls, like an unexpected bonus or inheritance.
Do extra payments automatically go to principal? ›
Any funds you pay in addition to your monthly payment amount will be automatically applied to your principal balance unless you specify otherwise.
