Homeownership isn’t for everyone. Maybe you like the idea of renting, as you’re not tied down to one place or responsible for repairs. But although renting offers a certain measure of freedom, there are undeniable benefits to buying your own place. Not only are you able to decorate and remodel the house as you please, you can write off mortgage interest plus earn equity as you pay down the mortgage. But since buying a house involves financing a large sum, it takes (on average) about 30 years to pay off a home loan.
Paying off a house over the next three decades might not be the ideal scenario, and while you can go with a shorter home term and reduce your principal faster, this can also increase your payment by hundreds of dollars each month.
Don’t think that a 30-year mortgage is your only option if you can’t afford a 15-year or a 20-year mortgage term. Making one extra home loan payment each year can be just as beneficial, reducing your home loan term by approximately eight years. One extra payment each year may not seem like a big deal, but this simple move knocks down your principal faster, which reduces how much you owe in interest.
Thinking about paying off your mortgage loan early? Here are three options for making an extra mortgage payment a year.
1. Double your mortgage payment on your anniversary date.
Each year on the anniversary date of your mortgage, simply make a double payment. If you normally pay $1,200 a month, submit a payment for $2,400. For this method to work, make sure that your lender applies the extra payment to the principal. If you simply mail a larger check and don’t mention the purpose of additional funds, your lender may automatically apply the overpayment to your interest, which doesn’t reduce your principal.
If you’re mailing a check, send two checks, and then write “principal only” in the memo section of one of the checks. If you’re making an online payment, there should be an option to include an additional principal payment.
2. Increase your monthly payments by 1/12.
Maybe a double payment each year is a stretch for you. No worries, you can achieve the same result by adding extra to each month’s mortgage payment. Simply divide your mortgage payment by 12 and then increase your monthly payment by this amount. For example, if your mortgage payment is $1,200 a month, increasing each future payment by $100 is the equivalent of one extra payment a year.
3. Make bi-weekly payments.
Another option, pay half your mortgage payment every two weeks. Since there are 52 weeks in a year a bi-weekly payment schedule results in 13 mortgage payments – or one extra payment a year. Talk with your lender first, as some banks do not accept half payments. And if you decide to go this route, understand that a bi-weekly schedule isn’t something you can modify. Once you agree to this term, your lender will expect a payment every two weeks, and missing a payment can result in late fees.