It’s never nice to have debts hanging over your head, and one of the biggest debts you can have in life is a mortgage. If you have room in your budget or some extra cash, something you can consider doing is making extra mortgage payments. You might be wondering exactly how much you can save or how many years you can knock off your mortgage by making these extra payments. Figuring out the answer to those questions involves amortizing a loan over decades, which is a complex process.

There are many calculators online that can help you to get a concrete answer with a bit of information on your mortgage. You can also use them to see what changes by sending your lender one additional mortgage payment a year, making a one-time lump sum payment, or even by adding extra payments each month.

It’s worth noting that you don’t have to make extra mortgage payments. What matters is that you are honoring your existing mortgage payments. However, if you do have extra money available or can budget some and want to, then there are some significant benefits to doing so.

The benefits of making extra mortgage payments

1.    Build equity faster

Because equity is your total assets minus your total liabilities, your equity increases as you reduce your principal and interest. Having equity built up in your home will increase its value as an investment, meaning that you’ll enjoy increased profits if/when you sell. Equity also gives you the option of future home improvement loans, and if you have less than 20% equity and are paying private mortgage insurance, then these extra payments will help you to reach that 20% threshold faster, thereby eliminating the PMI payment.

2.    Save money on interest

You can specify that your extra payments are for your principal so that you can gradually reduce your loan balance. The lower your loan balance, the less interest is added onto your monthly mortgage payment every month. So you pay less interest over time, pay off your mortgage earlier, and save money in the long run.

3.    Pay off your mortgage earlier than expected

What’s crazy is that one extra payment a year can actually help you to pay off your mortgage by as much as three or four years earlier than without. With more additional payments, you can shave off even more years. Those extra dollars can be used for any number of other things!

Ways to make extra mortgage payments

If you’ve convinced that you’d like to make an extra mortgage payment, here are some of the ways that you can do that. This is by no means an exhaustive list, but it’s a great way to get started.

1.    Biweekly payments

Instead of making monthly mortgage payments, divide them in half and then make them bi-weekly. This is a clever (and kind of sneaky!) way to add in an extra mortgage payment every year. Since the length of months varies in the year but the length of weeks doesn’t, you’ll find that 26 half-payments (paid bi-weekly) will equal 13 whole payments. You make an extra payment while barely noticing it.

2.    Extra money in monthly payments

Here’s an easy way to decide how much to add onto your monthly payments. Divide your monthly mortgage payment by 12. For example, if your monthly payment is $1,200, then divided by 12 that would be $100. Add that onto your payment so that each month you pay a total of $1,300 instead and you’ll have an easy method of chipping away at your debt that you barely notice.

3.    Lump sum

Save any leftover money you have throughout the year until it equals a monthly mortgage payment or maybe even a greater goal that you’ve set. You can then pay this to your loan provider at any point during the year. Be sure to let them know that it should go toward your principal. You can contact your loan provider for more information on how to do this.

Be mindful

While it’s great to slowly cut through your debt, make sure that doing so won’t hurt you financially. If you have another debt that’s high interest or perhaps a 401(k), then your extra money could possibly be better spent on these. You also should have enough money set aside for 3-6 months of living expenses that makes up your emergency fund which will protect you in case something happens to your source of income, or you have a crisis.

Additionally, some loan providers penalize prepayments. These usually apply to much larger paydowns, but double check before you take any action. If you’ve already considered all of this and are sure that extra mortgage payments are something that you can manage, then it’s a great financial decision. Every bit helps!

Are you shopping for a mortgage? Whether buying or refinancing, contact a Jersey Mortgage branch location nearest you for a free no-obligation consultation.