Accelerating Financial Freedom: The Power of Making an Extra Mortgage Payment Explained
Did you know that making 1 extra payment on your 30-year mortgage each year could allow you to pay it off 4 years sooner, while saving close to $29k in interest?! That’s a big deal!
Hi, I’m Darren from Simmons Capital Group. Today we’ll discuss some factors to consider when deciding whether it’s a good move to make extra mortgage payments.
In my experience, the decision to pay off debt faster than scheduled, whether it be a mortgage, student loan or car loan can be analyzed from an emotional or financial perspective. Often, making extra payments on your mortgage can make sense from both an emotional and financial viewpoint, as being mortgage-free and owning your home outright can bring a lot of emotional security, and the amount of interest saved over the life of the mortgage can be very significant.
One of the primary financial benefits of making extra mortgage payments is that it reduces the outstanding principal balance of your loan. As a result, you'll pay less interest over the life of the loan. Mortgages are structured so that you pay more interest in the early years, so making extra payments can significantly decrease the amount of interest you pay.
The financial impact of extra mortgage payments depends on your mortgage interest rate. If you were one of the lucky people that locked in a low interest rate in recent years, the benefits of paying it off early may be less significant compared to potentially pursuing other investment opportunities. For example, if your mortgage rate is 3%, and you reasonably think that you can earn more than 3% on long-term investments, you might be better off investing vs making the extra payments. However, if your mortgage rate is higher, let’s say around, 7%, you might do better to take advantage of paying off the 7% loan faster, rather than hoping to generate higher returns in other investments, with no guarantee of future returns.
In addition to potentially saving on interest, each additional payment increases your home's equity, which can be helpful if you plan to sell your home or take out a home equity loan in the future.
If you decide to make extra payments towards your mortgage, I would offer a few tips:
If you are within 10-15 years of retirement, do the math to figure out whether it would benefit you more to save more into your 401k or payoff the mortgage in the final years of working. You might be surprised that paying off the mortgage is often a better route to take for those close to retirement.
If making extra payments, ensure that your mortgage holder is applying your extra payments directly to principal and not interest.
Run some calculations to see the impact of your extra payments. This might help you to stick with your plan, even if cash flow is a little tight and the temptation to stop your extra payments creeps in.
Even if not making extra payments on a fixed schedule, paying your mortgage bi-monthly vs monthly can actually help pay off the loan faster.
If not making regular monthly extra payments, try look for ways to make lump sum extra payments from unscheduled cash inflows like tax refunds or bonuses.
Lastly, ensure you have an adequate emergency fund before committing to extra mortgage payments. It's essential to have savings for unexpected expenses to avoid financial strain. If you have other high-interest debts, it may make more financial sense to pay those off first before making extra mortgage payments.
In summary, making additional mortgage payments can help save money on interest, pay off your mortgage faster, and build your home’s equity. However, it's crucial to weigh the benefits against other financial goals and consider your specific financial situation before deciding to make extra payments. If you would like to discuss your own personal financial situation, please give us a call at 518-406-5624 or schedule a time on our calendars at simmonscapitalgroup.com.
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