Make An Extra Mortgage Payment Each Year And Save Thousands
Did you know, by making just one extra mortgage payment each year you can shave off years from your mortgage and reduce thousands of dollars in interest payments. There is no secret to this statement if you understand the time-value of money. The sooner you give the bank your payment, the sooner interest STOPS accumulating on the money borrowed. Doing this consistently over the life of the loan can save you lots of money and reduce the term of your loan from 6 to 8 years.
So how do you go about making an extra mortgage payment each year? Mortgage Payment Due
There are three primary ways in which you can accomplish making that extra mortgage.
- Send an additional principal payment equal to 1/12 of a normal payment each month. At the end of 12 months, you’ll have paid a full extra payment. An easy way to do this is to configure your automatic payment to send in that additional 1/12 as principal along with your normal payment.
- Instead of monthly payments, perform bi-weekly payments equal to 1/2 your normal monthly payment. This results in a total of 26 half payments (or 13 full payments). Also, because your making payments sooner, you reduce the compound interest you incur. Now, before you run to your online banking and start scheduling bi-weekly mortgage payments, you have to first see if the bank (loan servicer) will even allow this, and if so, does it have the desired result. Let me explain. The loan servicer is often a middle man between you and the actual lending institution. So while you may send the loan servicer a payment every other week, they may be hold onto it and only pay your loan for you on a monthly basis, negating your intention. Therefore, it is important that you inquire with your loan servicer to see if you can reduce the compound interest charged by making bi-weekly payments and if there are any fees associated with doing this.
- Send a one-time additional principal payment equal to a full month’s payment once a year.
Beware of Bi-Weekly Mortgage Reduction Services and Savings Programs
Most anytime you take out a mortgage, either as a home purchase or a refinance, what soon follows is an invitation from your bank or loan servicing company to make your payments bi-weekly. The enticement is that they will make bi-weekly mortgage payments for you. This convenience usually comes at a cost though, sometimes as an upfront enrollment fee ($200-$400), or as a monthly transaction fee ($4 to $9). This hefty price tag can chew away from the benefits of paying early, and can be easily avoided by doing it yourself.