Can an Extra Mortgage Payment Really Save Hundreds of Thousands of Dollars?

Posted on 05. Jan, 2011 by Douglas Grey in Real Estate 101

Sending in an extra mortgage payment can help you save money by paying down the principal on your home loan.

Congratulations! You reached the point at which you can afford a luxurious home. Making the mortgage payments on the American Dream is not a problem. Thankfully, you are doing so well you could afford to make an extra mortgage payment each month, and still not be severely strapped.

You are still young, still healthy, and already looking forward to an early retirement from the corporate world in favor of a less structured consulting schedule, and more time for leisure pursuits. Either making an extra mortgage payment each month, or executing an early mortgage payoff via another method, will pay for a fine vacation home at the very point in your life when you will be able to enjoy it to full advantage.

An Extra Mortgage Payment Saves Money

That’s right—an extra mortgage payment on your primary residence can literally pay for a second home by saving you tens, if not hundreds of thousands of dollars in interest payments. Why allow interest payments to support the bank? Funnel your dollars back into your assets; raise the equity on your balance sheet. Plan for an early mortgage payoff.

Consider this: mortgage lenders are willing to risk their investment in a home because the reward ratio is in their favor. Over the course of an average 30-year mortgage, the lender will double its money, all the while having solid collateral to cushion against disaster.

Leverage your peak earning years to put a periodic extra mortgage payments towards an early mortgage payoff, and your reward could be a second dream home in the getaway location of your choice, with both homes owned outright and plenty of years left to enjoy them both.

Do the Math: Achieve an Early Mortgage Payoff

Discipline yourself and adjust your budget to make two mortgage payments per month. Even if you don’t increase the total monthly payment, you will reduce your interest costs considerably over the term of the loan. Bi-weekly mortgage payments are powerful savings tools.

Assume, for instance, that you paid $800,000 for a house at 7% for 30 years. If you make extra mortgage payments each month, you could pocket a quarter million dollars and own the home clear in roughly 22, rather than 30 years.

Very chic, and not too shabby. You paid down the front end loaded interest payments at an accelerated rate, and began to pay off the principal earlier.

By closing on a 30-year mortgage, rather than a 15, you keep your options open each month. You are not required to submit the extra mortgage payment. Should your circumstances change, you may find other needs for the money. If so, you will not need to refinance. Bi-weekly payments are under your control.

How to Pay Off  Your Mortgage Early

Entire companies have been established to facilitate extra mortgage payments per month for homeowners. Naturally, they profit by taking back a cut of the interest you are saving. The best way to execute an early mortgage payoff is to do it on your own. However, it is essential that you consult with your lender, accountant and real estate attorney to ensure that the terms of the loan permit extra mortgage payments and an early mortgage payoff. In certain cases, you may be, in effect, penalized for helping yourself become debt-free quicker, because to do so reduces your lender’s earnings.

Mortgage calculators are plentiful around the web. Spend some time running what-if scenarios, watching what happens when you make an extra mortgage payment per year, twice per year, or per month. The results can be astounding.

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Tags: Mortgage