The 30-year fixed rate mortgage is one of the most common home loans, one you’re probably already familiar with. Thinking about paying your mortgage for the next 30 years can seem overwhelming, but there are simple ways to shorten your loan term and save yourself significant money.
How much interest will you pay if you don’t pay ahead on your mortgage?
Making any extra payments on the principal amount of your loan (the original amount of money you borrowed) helps cut down on your interest. Reducing the amount of interest you’ll pay on the life of your loan can also reduce the number of years you’ll be paying on it.
So, any time you make an “extra” payment on your mortgage, let your loan servicer know that you want these funds to be applied toward your principal loan balance. This doesn’t happen automatically.
A little goes a long way, and you don’t even have to double your monthly mortgage payment to see a payoff from paying ahead.
For example, if you have a 30-year fixed-rate mortgage on a median-priced home, roughly $250,000, with an annual percentage rate of about 5, you may pay around $1,342.05 a month as a principal and interest payment. Paying this exact monthly payment over the full loan term means you’ll pay approximately $233,133.89 in interest.*
3 ways paying more on your mortgage can pay off big-time
Here are a few strategic ideas to cut down on thousands of dollars in interest:
1. Pay your monthly mortgage payment plus an extra 1/12.
Why this works: It may not sound like a lot to add $111.84, or 1/12 of a payment, to your monthly mortgage, based on the example above. But every year, you’ll pay an extra month in mortgage, shortening your loan term by four years and eight months. And, you’ll save $42,000 in interest.
2. Pay $50 extra toward your monthly mortgage.
Why this works: Again, $50 may not sound like much over a 30-year loan term, but chipping away at your principal with this small amount will save you $21,000 in interest and take more than two years off your loan. In 28 years, you’ll be thanking your past self for saving you over two years of unneeded payments.
Why not crunch the numbers? Use our Mortgage Payoff Calculator to find out if the time is right.
3. Pay one-time lump sums when you can afford it.
Why this works: Whenever you have a little extra cash on hand, from a tax return, annual bonus, or investment dividends, put that money toward the principal on your mortgage. You can use this option to cut costs and interest, though it’s less reliable than making extra monthly payments.
Before you pay ahead on your mortgage, it’s important to use additional funds to pay down high-interest debt, like credit cards. You might also not benefit from paying ahead on your mortgage if you don’t plan to stay in your house for more than a decade. Talking to your loan officer about the pros and cons of paying extra can clear up any questions.
6 more ways to pay off your mortgage sooner
When it comes to making your mortgage more manageable — and saving yourself thousands — every bit helps. If you’re looking for more strategies to save money or shorten your loan term, check out the six tips in our video. You can also cut to the chase and get personalized support to come up with a pay-down plan by asking your loan officer for guidance. Click here to find a friendly loan officer near you.
*MBS Highway payment estimate, 2020. Rates listed are for illustrative purposes only.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.