Benefits of Extra Mortgage Payments

The benefits of extra mortgage payments outweight the effort. Making extra mortgage payments might seem like a small effort, but it can significantly impact your financial future. Whether you’re planning to stay in your home long-term or thinking about selling within a few years, adding even a small amount to your monthly mortgage payment can bring huge benefits. In this blog, we will explore the advantages of making extra mortgage payments, providing both short-term and long-term perspectives.

Save Money on Interest

One of the most significant benefits of making extra mortgage payments is the potential savings on interest over the life of the loan. Let’s consider an example: suppose you have a $400,000 mortgage with a 30-year term and a 7% interest rate. Your monthly payment is approximately $2,661. If you decide to pay an additional $100 each month, the savings can be impressive. There are so many online calculators that can help you visually see the benefits.  Bankrate.com has a user friendly calculator – try it out here!

Over the 30-year term, this extra $100 per month will reduce your interest payments by around $64,800. Furthermore, it will shorten your loan term by nearly 3 years, allowing you to pay off your mortgage in about 27 years instead of 30. This means you’ll be mortgage-free sooner and have more financial freedom to allocate your funds elsewhere.

Build Equity Faster

Making extra payments helps you build equity faster. Equity is the portion of the property you truly own, which increases as you pay down the principal balance of your mortgage. When you sell your home, the equity you’ve built can be a significant financial resource.

For example, if you decide to sell your home after seven years, the additional $100 payments will have reduced your principal balance more than if you had only made the minimum payments. This results in higher equity, which can be used as a larger down payment on your next home, or for other financial goals such as investing or paying off other debts.

Increased Financial Security

Building equity faster provides financial security. In times of market fluctuations, having a larger equity cushion can be reassuring. It also gives you more flexibility for refinancing options, potentially at better rates or terms, if needed.

A larger equity buffer can protect you against potential downturns in the real estate market, as you owe less compared to the home’s value. This increased financial security can provide peace of mind, knowing that you’re in a stronger position regardless of market conditions.

Flexibility for Future Financial Goals

Even if you don’t plan to stay in your home for the full term of the mortgage, making extra payments is beneficial. Most homeowners sell their homes after about seven years. By making extra payments, you will have a lower principal balance, which means you’ll have more equity when you sell. This can translate into a larger down payment for your next property, reducing the amount you need to borrow and potentially securing better loan terms.

Improve Refinancing Options

If you ever consider refinancing your mortgage, having made extra payments can improve your options. A lower principal balance and higher equity can make you a more attractive candidate for refinancing. Lenders may offer better interest rates or terms, which can further reduce your monthly payments and save you money over time.

Peace of Mind

Finally, making extra mortgage payments can provide peace of mind. Knowing that you are reducing your debt faster and saving money on interest can alleviate financial stress. This proactive approach to managing your mortgage can help you feel more in control of your financial future.

In summary, making extra mortgage payments, even as small as $100 per month, can save you a substantial amount of money in interest, help you pay off your mortgage sooner, and increase your home equity faster. This financial strategy can benefit both long-term homeowners and those who plan to sell within a few years. So, consider adjusting your budget to incorporate these extra payments—your future self will thank you.

If you found this helpful, be sure to check out my other articles for more tips on managing your finances and maximizing your investments.