Making some additional payments on your mortgage can be a great idea where it can save you thousands of dollars while trimming years off of the loan duration. It is suggested that you do this on your own terms rather than enrolling in an accelerated payment plan as they can cost you money.
Here are a few helpful tips for paying down your mortgage ahead of schedule.
1. Make one extra annual payment
Making an additional payment is easier if you get something like a yearly bonus, a nice tax refund or similar lump sum of money. Take this money and apply it to the next mortgage payment that you make towards the principal. This will help reduce the principal so you will be ahead of schedule and will also help shorten the lifespan of the loan.
2. Increase your monthly payment by one twelfth
The additional money that you are applying towards your loan balance is typically credited automatically to the principal. The principal is the total amount that you owe less the interest. The majority of the money you pay early on in the mortgage term is primarily interest so paying down the principal will save you a lot of money in the years ahead.
3. Pay half of your regular payment every two weeks
Some mortgage lenders will allow you to do this at no cost while others may require that you enroll in a plan for a small cost. Otherwise you can manage this sort of schedule yourself on your own accounts. Try transferring these payments from checking to savings accounts every two weeks, then pay the total amount to your lender when payment is due typically at the beginning of the month.
The end result is that after a year you will have made 26 half payments or 13 full payments which translates to 1 extra per year. For an example of potential savings, a $200,000 30-year loan with one extra payment per year will reduce it to 26 years with a savings of over $32,000 in interest.