A Year-End Move That Can Save You Thousands in Mortgage Interest
Have you considered making an extra mortgage payment going forward each year? Doing this can save you tens of thousands of dollars in interest payments during the life of your loan. How much you’ll save will vary by the size of your loan, your mortgage interest rate and your loan’s term. But the savings can be surprisingly large.
Making one extra payment a year will also reduce the number of years you’ll need to make payments. If you make this extra payment each year, you could reduce your mortgage term by 5 years or more.
How much can you save?
Yahoo! Finance gives a good example of how much you might save.
Say you take out a $300,000 30-year fixed-rate mortgage at 6.75%. This comes to a monthly payment of $1,946, excluding property taxes and insurance.
If you hold onto this loan for its full 30-year term and you make 12 payments of $1,946 a year, you’d pay $400,486 in interest.
But what if you make an extra $1,946 payment each year? First, it would cut out nearly six years of payments. It would also lower the interest you pay on the loan to $309,414 if you hold onto the mortgage for the full 30 years.
That comes out to savings of more than $91,000 in interest payments.
Make sure when making an additional payment that you specify that you want the money to go toward your loan’s principal balance only, not to principal and interest. If you make this extra payment online, you’ll typically have the option to specify how you want the dollars applied.
Should you make an extra payment each year?
Does making an extra mortgage payment each year make sense for you? Maybe. It depends on your financial situation.
Don’t make this extra payment if doing so means that you’ll struggle to pay your other bills. You shouldn’t make this extra payment either if you are carrying credit card debt month to month. Because credit card debt comes with such high interest rates, it’s better to use any extra money to pay off your card balances instead.
You shouldn’t devote extra money to your mortgage if you haven’t built an emergency fund, either. An emergency fund can protect you from financial disasters if you face an unexpected large expense. If you have an emergency fund and your car’s transmission conks out or your water heater leaks onto your basement floor, you can use the dollars in it to cover the repair costs. You won’t have to resort to charging these big bills on your credit card.
If you don’t have an emergency fund, devote any extra dollars to building one before you consider making extra mortgage payments.
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