Learn why it's smart to make an extra mortgage payment each year–and when you shouldn't!
Why make an extra mortgage payment?
By making one extra payment each year you cut a 30-year mortgage down to 23 years, saving you thousands of dollars of interest. Just like with all financial goals, every little bit helps!
How to make an extra mortgage payment this year:
1) Round up or pay a little more each month. Take the amount of your monthly mortgage payment and divide it by 12, then add that much to your payment each month. This spreads the extra out into smaller, easier-to-manage installments.
2) Use your tax refund or other bonus to make a one-time payment each year. Rather than spend “surprise” money, earmark it for an extra mortgage payment.
3) Change your payment schedule to bi-monthly, like your paycheck. This adds two extra payments per year to your mortgage, but it's spaced out so you don't notice it so much.
However you make the extra payment, be sure that it's going towards the principal on your loan.
Is there ever a reason not to pay extra? Yes!
- Credit card debt–If you are carrying consumer debt, it's more important to pay that off at the 20+% interest rate than to put any extra money into mortgage debt.
Be clear on what kinds of debt you have and how much interest you're paying on each so you can make the smart move.
- Penalties–Some mortgage companies actually charge a penalty fee for making extra payments and/or paying your mortgage off early.
Call the customer service department to make sure that any extra money you're sending is going towards the principal and not triggering a fee.
- No emergency fund–if you don't have savings to cover family emergencies, applying extra money to the mortgage is not as important as holding onto it.
Why focus on paying off your mortgage?
I am so inspired by posts like these from Kelly at View Along the Way and Sean's story at Learnvest. While we've shared our yearly financial goals, one very-long-term goal is to be completely debt-free (meaning no mortgage at all) prior to retirement.
That drops our cost of living dramatically and allows for us to be in control of all of our money, a much better position to be in once living on a fixed income.