What happens if I pay 3 extra mortgage payments a year?

Accelerate Mortgage Payoff with Three Extra Payments a Year

Making three extra mortgage payments annually can have a significant impact on the lifespan and overall cost of your loan. By strategically applying these additional payments, you can accelerate payoff, reduce interest accrual, and save substantial money over the long run.

Benefits of Making Three Extra Mortgage Payments

• Shorter Loan Term: Extra payments reduce the remaining principal faster, leading to a shorter loan term and earlier homeownership.
• Reduced Interest Accrual: By paying down the principal more quickly, you reduce the amount of interest you pay over the life of the loan, saving significant money.
• Equity Build-up: Extra payments increase your home equity at a faster rate, providing you with greater financial security.

Strategy for Implementing Extra Payments

To effectively accelerate mortgage payoff with three extra payments a year, follow these steps:

1. Calculate Your Extra Payment Amount: Determine the total amount of your annual mortgage payment and divide it by 12 to get your monthly payment. Multiply that amount by three to get the total extra payment you’ll make annually.
2. Set Up Automatic Payments: To ensure consistent extra payments, set up automatic transfers from your checking account to your mortgage account on a monthly basis.
3. Apply Payments to Principal: When making extra payments, specify that they should be applied directly to the principal balance. This maximizes interest savings.

Example of Savings

Consider a 30-year fixed-rate mortgage of $200,000 at an interest rate of 4%. With regular monthly payments, it would take 30 years to pay off the loan with a total interest cost of approximately $90,222. However, if you make three extra payments of $1,000 per year, you could pay off the loan in just 25 years and 6 months, saving over $31,000 in interest.

Conclusion

Making three extra mortgage payments a year is a proactive financial strategy that can significantly reduce the duration and cost of your loan. By implementing this plan, you can fast-track homeownership, save money on interest, and build equity at a faster pace. This financial maneuver yields substantial benefits, setting you on a path toward financial freedom and the peace of mind that comes with owning your home outright.