Making Extra Monthly Mortgage Payments To Pay Off Loan Early

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will discuss and cover the topic of making extra monthly mortgage payments to pay off loan early. We will be going over the benefits of Making Extra Monthly Mortgage Payments To Pay Off Loan Early. Our loyal readers know we are experts in mortgage financing. We are able to help more clients than most lenders because we do not have additional LENDER OVERLAYS on our CONVENTIONAL, FHA, and VA mortgage loans. We also offer a full slate of NON-QM mortgages and USDA mortgage loans. We even have down payment assistance in renovation loans available. We can help you obtain a mortgage. We also want to give you some advice on how to pay your loan off faster.

The Benefits Of Making Extra Payments To Pay Off Home Loan Before The Term Is Up

Recently I saw a hilarious post on Facebook from one of my friends who just bought his first house. It said something along the lines of “Ready for numerous trips to Home Depot and 30 years of being poor.” It is estimated, roughly 94% of first-time homebuyers utilize a 30-year mortgage product to purchase their home. Data shows the average American is on their home loan for between 5 1/2 and 6 years. Whether they sell the home or refinance, it is rare that you will be in your mortgage loan for the full 30 years. In this article, we will give you a few tips and tricks our clients have shared to pay their principal balance down faster than their mortgage terms.

Bi-Weekly Versus Monthly Payments

Bi-weekly payments:

  • Bi-weekly mortgage payments are exactly what they sound like, a mortgage payment every other week
  • The concept of a bi-weekly mortgage payment is simple. It is a way to make an extra mortgage payment every year
  • You will make half a mortgage payment every other week, totaling 26 half payments or 13 full payments
  • The 13th payment will be applied directly to your principal balance
  • This extra payment can save you tens of thousands of dollars over the life of your loan
  • It adds up quickly
  • If your employers’ pay cycle is every other week, this is a great opportunity for you to start building equity in your property at a much faster pace
  • Since you are paying your loan off faster, you are effectively lowering your interest payments
  • Nobody has ever complained about paying less interest
  • Mortgage servicers sometimes have bi-weekly as a payment option, or you can set up directly through your personal bank
  • There are even third-party services that will help you set up bi-weekly payments

However, you typically paid them a couple of bucks to take care of this service for you.

Case Scenario Of Making Extra Monthly Mortgage Payments

Here is a case scenario: Example:

  • Let’s use a $250,000 home with a 5% down payment and an interest rate of 4.5%
  • The principal and interest payment will be $1,203 a month OR $602 bi-weekly
  • If you make your monthly payment up to $1,203 for the full 30 years, you will eventually pay $433,216
  • If you chose to make a biweekly payment of $602 (equivalent to $1308 a month), you will end up paying $398,731 over the life of your loan

That saves you $34,485. As you can see, this is a substantial amount of money.

Making One Extra Monthly Mortgage Payment Each Year

Pay extra each month:

  • One more great tool for paying your loan off faster is simply adding extra payments to your minimum payment due
  • If you are able to afford more than your minimum mortgage payment, this is a great way to reduce your mortgage term
  • If you add 1/12 of your mortgage payment to each mortgage payment over the course of the year, you will effectively make one additional payment just like a bi-weekly payment method above

Paying more than that will simply lower your terms even further.

Applying Income Tax Return Refunds Towards Principal Paydown

Tax return to principal balance:

  • This time of year is a great opportunity to apply the extra money towards the principal balance of your mortgage
  • Many mortgage borrowers apply their tax return refunds to the principal balance of their mortgage
  • Doing this consistently every year can really save you over the long run

Random chucks applied to principal:

  • Some of our borrowers receive quarterly or annual bonuses from work
  • Assuming your financial situation allows, sending these bonuses directly towards the principal balance will also lower the term of your mortgage
  • Saving you on the interest of the mortgage loan balance

Making Extra Payments And Applying Towards Principal Balance

Making Extra Payments And Applying Towards Principal Balance

MAKE SURE EXTRA FUNDS GO TO PRINCIPAL BALANCE:

  • I have heard horror stories in the past where borrowers send extra payments that get applied towards interest or sometimes even to their escrow account
  • There is a certain box you must select to apply your extra funds towards the principal balance
  • This box is very important but also easy to locate
  • If you make your payments online, there’s a special section for extra principal payments
  • If you make your payment with a check, your mortgage statement will have a box for additional principal funds

Make sure you contact your servicer to verify your funds are being applied towards the principal balance of your mortgage.

Tips And Tricks When Making Extra Mortgage Payments

Every homeowner’s dream is to have a home that is free and clear. Most homeowners have a 30 year fixed rate mortgage loan. The term to pay off their mortgage loan is 30 years if they make the minimum principal and interest mortgage payment. However, by making extra mortgage payments, a homeowner can pay off their mortgage loan balance many years prior to the 30-year term being up. Many mortgage servicer offer a bi-weekly payment plan for borrowers. Payment your mortgage payments bi-weekly versus monthly will save you close to 7 years off the term of your loan. Why is it so?

Making Bi-Weekly Mortgage Payments

Because by making bi-weekly mortgage payments, you are making an extra month’s of mortgage payments every year. That shortens the term of your home loan. Besides setting up a bi-weekly payment plan with your mortgage servicer, whenever you have extra cash, you can always pay down the principal loan balance.

How To Make Sure Bi-Weekly Principal Payments Get Paid

Make sure when you are making extra payments to pay down your principal balance to tell the mortgage servicer to apply the extra payment to pay down the principal of your mortgage loan balance. Making extra mortgage payments every month does not have to be a substantial amount. It is just a practice and habit of paying just a little bit of extra payment each and every month extra in addition to their monthly minimum mortgage payments.

Having Extra Money To Pay Down The Mortgage Balance

As long as homeowners can afford to make that little extra cash they have on paying extra mortgage payments to pay down the principal loan balance instead of splurging on other items, they are on the road to achieving the goal of owning a home without a mortgage. By making that extra mortgage payment and applying towards the principal can reduce their 30-year mortgage term to 25 years, 20, years, or even less than that. Depending on how much extra you can make towards principal payments. Paying the mortgage loan balance earlier than the end of the mortgage loan term will also save homeowners tens of thousands of dollars

Benefits Of Making Extra Mortgage Payments

Benefits Of Making Extra Mortgage Payments

The main benefit of making extra mortgage payments each month is homeowners can save years off the term of the loan term. Depending on how much and how consistently you make extra payments that is above and beyond the minimum monthly mortgage payments. Just by making bi-weekly versus monthly payments, homeowners get to save tens of thousands of dollars in mortgage interest over the life of the mortgage loan. They get to reduce their 30-year mortgage loan term. If homeowners were to pay an extra $100 per month towards their principal and interest every month they can save thousands in mortgage interest.

Reducing Loan Term By Making Extra Loan Payments

Can most likely reduce mortgage term by more than 5 years depending on how much mortgage balance is. A couple of hundred dollars in making extra mortgage payments every month can mean a 10-year reduction on the term of the loan. The higher the mortgage rate, the better result borrowers will make in making that extra mortgage payment every month. Many homeowners who are disciplined in making extra mortgage payment every single month can reduce their loan term by more than half. How would you like to have the mortgage paid off in 15 years or less. It is not impossible. It is definitely doable without changing financial profile.

Best Investment By Making Extra Mortgage Payments

Consider making extra mortgage payments every month as an investment. The more extra payments homeowners make on their mortgage payment each and every month, the more they can get a return on investment on their home. The best investment most Americans can make is the investment in their home where there is little to no risk. Making extra mortgage payments every month will rapidly increase equity in the home.

Think Ahead Of Retirement

All hard-working Americans will retire. When they retire, they will definitely see a major reduction in their income. This is no matter if they have social security income, pension income, or income from their retirement accounts. The housing payment is a person’s biggest monthly expense. For a retiree, mortgage payments can exceed more than 50% of their monthly fixed income. The mortgage payment is not the only expense. Homeowners also have gas bills, water bills, electric bills, cable bills, telephone bills, internet provider bills, and other monthly bills. All these bills are where many seniors stress over their monthly bills due to their mortgage payments.

Thinking About The Future And Retirement

Everyone’s retirement plan should be by having their homes paid off by the time they retire. The best way to do it is by paying a little extra every month towards their mortgage loan balance.  I have seen many times over and over where a $200 extra monthly mortgage payment every month can reduce the 30-year mortgage term to less than 15 years or less.

Advice On Making Extra Mortgage Payments To Pay Off Loan Balance Early

These tips and tricks can save you thousands of dollars over the life of your mortgage. Sometimes this is more effective than a rate and term refinance. Depending on your current loan situation, the presence of mortgage insurance, and additional payments you can afford, it may not make sense for you to complete a rate and term refinance. For a refinance quote, please give us a call today. Please call Mike Gracz at 630-659-7644 or send an email to [email protected]. Gustan Cho Associates are experts in mortgage financing. Please give us a phone call with any questions regarding paying your mortgage off faster. We are here to help seven days a week. Subscribe to our YouTube CHANNEL to stay up to date on all mortgage news!  

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