Here’s Why You Should Make An Extra Mortgage Payment

Posted February 25, 2014

By Scott Gamm

NEW YORK (MainStreet) — For homeowners, one of the most burdensome financial albatrosses is mortgage debt, especially during retirement.

Your mortgage is likely your largest expense. Aside from hoarding money in an IRA or a 401(k), paying off your mortgage prior to retirement is critical. Once you enter retirement, healthcare costs are bound to increase, leaving less room to fit a mortgage payment into your retirement budget.

An effective way to cross the debt-free finish line faster is paying one additional mortgage payment per year. Aside from reducing the life of the loan, you’ll save money in interest expenses.

If you can’t afford making an extra mortgage payment at the end of the year in a lump sum, consider making mortgage payments every two weeks throughout the year, which amounts to 26 payments and accomplishes the same goal as a lump sum.

When you apply for a loan, you’ll have access to an amortization schedule, which shows how your monthly payment is allocated, either towards interest or principal. Your initial payments tackle interest, while later payments deeper into the life of the loan take care of principal. Making an extra mortgage payment expedites this process.

“You’ll get that 30 year mortgage reduced to 24 or 25 years with an additional yearly payment, since the amount calculated for principal and interest is based on the new principal balance,” says Dani Babb, founder and CEO of The Babb Group.

If it’s more financially viable to make bi-monthly payments, rather than a single lump sum, be sure to alert your bank ahead of time. The first of the two monthly payments will not be enough to cover the mortgage and the bank may not know what to do with the payment. Your lender could apply this money towards interest or even deem your payment as insufficient, in which you would be behind on your mortgage from the bank’s point of view.

 

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