How to Make Additional Payments on a Mortgage
Paying off your mortgage can often seem like a daunting task. It’s the largest payment many of us will ever have. Yet, it’s easier to pay off than most of us imagine.
Why Should You Make Additional Mortgage Payments?
1. Peace of Mind
At Wiser, we encourage our clients to have their primary home’s mortgage paid off by retirement. By having your mortgage paid off, you are leading the way for your retirement to be without stress. When you get to retirement you will only want to have to pay for basic living expenses, not debt. That way if the market plummets or you have an unexpected expense arise, you are protected from having to pay a large mortgage payment.
2. Saves You Money
In the long run, paying off your mortgage will save you money on interest and give you a guaranteed return. For example, if you have a 30-year mortgage of $400,000 at a 6% interest rate, you will pay $463,352 in interest. Now say you contribute an additional $500 a month toward the principal. You will save $181,523 in interest. You are now receiving a 6% guaranteed annual return on your future dollars by not spending it on your interest. You just paid off your mortgage 10 years early and received a $181,523 payday. That’s the power of paying off your mortgage earlier.
3. Become Debt Free
To be debt free is to allow yourself the freedom to live your life peacefully and not be chained to something else. Substantial debt is like a parasite that leeches onto your earnings and refuses to let them go. Paying off your mortgage puts you one step closer to being debt free.
Steps to Determine How Much Extra You Can Pay
1. Analyze Your Cash Flow
Your additional payment does not have to be a certain amount, it simply needs to be a realistic amount for you. This begins by analyzing your monthly cash flows and seeing how much discretionary income you have at the end of the month. With this income, contribute an additional payment to the principal on your mortgage.
2. Utilize Our Mortgage Calculator
After you have determined the additional amount you can contribute monthly, you can input it into our mortgage calculator. This will give the calculations for how much you will save on interest, your new payoff date, and your overall expenses including principal and interest. If you would like to pay it off by a certain date you can calculate that as well. This is a great tool to put monetary value to your goal.
Pay Additional Towards the Principal
You need to specify you want your extra payments to go toward the principal. When you are paying extra towards your mortgage be sure that it is going to the principal and not the interest payments. You do not want to get caught up in paying additional interest when you could have paid directly toward the principal. You can do this in your online portal for most mortgages; however, if you do call be sure to receive verification that it will be allocated toward the principal.
Have more questions? Contact Us
Michaela Dowdy
Financial Planning Associate
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