Do extra mortgage payments really help save you money?

Paying extra on your mortgage can take years off the term of the loan and save you thousands or tens of thousands of dollars. However, avoid accelerated payment plans that charge you money to sign up for. There are better ways to pay ahead on your own.

3 Strategies for Paying Extra on Your Mortgage

Pay the extra amount as early as possible or in a way that makes sense for you, including these options:

1. Pay an extra one-twelfth of your monthly payment.

The additional money brings down your principal by that amount. This means you pay a little less interest every time you make an extra payment. On a mortgage of $900, this comes out to $975, or $75 extra each month. This is especially effective in the early stages of your mortgage when the biggest part of your payment goes toward interest.

2. Make one extra payment a year.

If you receive an annual bonus or a large tax refund, put part of it toward your mortgage. Since you can apply the additional payment directly to the principal, this strategy can take years off your loan term.

3. Pay half the monthly mortgage every two weeks. You can ask your lender if they will switch your payments to make this easier. However, many of them will charge you for the privilege. Others may not accept partial payments.

If that’s a case, it may be time to refinance your loan with a lender with more flexible payment terms. You can also put the money is a savings account and have it automatically transferred to pay your mortgage.

Using this strategy yields 26 half payments, or 13 full payments) annually—in essence, you are making an extra payment. Keep in mind that making an extra payment doesn’t allow you to skip a month or reduce your monthly payment at any time. However, it does greatly reduce the total interest you pay on your home.

Considerations

The first consideration is how long you plan to stay in the home. If you want to retire in the home, extra payments are a great idea. You’ll pay off the home sooner, pay less total interest and have more money for retirement. If you plan to move within three years, you won’t impact the loan term or save money.

Those with an adjustable rate mortgage may have lower payments when interest rates are low. In that case, making extra payments while you can afford them is a great strategy for paying bringing down the principal. When rates go up, the interest portion of your payment increases, so you may not be able to afford extra loan payments if the monthly mortgage goes up.

Ask Your Mortgage Company About Refinancing

If interest rates drop, you may also be able to ask your lender or another mortgage company about refinancing options that can save you money on interest and drastically reduce your overall payments.