Making extra mortgage payments can put cash in your pocket long-term

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Ask a Lender
April 27, 2017 | Updated September 21, 2017


Key Points

The basics of making additional loan payments

  • Making extra mortgage payments can save money long-term and help to shorten the payoff period.
  • The borrower has the flexibility to decide how much and when to make the additional payments.
  • Carefully evaluate the services of companies that charge a fee for setting up fast-track loan-payment.
  • Refinancing can work if you plan to remain in the home long-term and have a large loan balance.

Borrowers have the option to pay down their home loans faster by kicking in more money each month on top of their monthly mortgage payments.

This amount can be a little or a lot, but if the borrower makes a habit of paying more each month than is actually due, it does guarantee a few things.

It will take less time to pay off the loan and also save potentially thousands of dollars in interest payments over the life of the loan. By making additional payments, the borrower is ultimately lowering the overall cost of their home.

Making additional payments also can be viewed as an investment. Those extra payments reduce the loan principal and are building equity — or the owner’s stake — in the home. That money can be cashed out at a later time through a refinance.

Building up equity can also be a good hedge against changes in the market value of the home. If home values decline, for example, the homeowner with equity is less likely to be stuck in a situation where they owe more on their mortgage than their home is worth — making it a money-losing scenario to sell the home.

Options to pay more

Homeowners can make additional loan payments in a number of ways. They can commit themselves to making an extra mortgage payment whenever they get a tax refund, a bonus at work or a one-time windfall, or they can set up a fixed schedule for making extra payments.

In recent years, several companies have sprouted up offering “loan-accelerator” programs, which put a homeowner on a faster track to paying off a mortgage. The federal Consumer Financial Protection Bureau has lately frowned on the fees charged by these companies, however. Borrowers should carefully evaluate services that charge a fee.

Extra payments vs. refinancing

Paying more on the existing mortgage than is due each month is just one way, however, to reduce the payoff time and save money on interest. The other option is to refinance into a shorter-term mortgage, which can potentially save a homeowner even more money and put the borrower on a faster schedule to pay off the loan.

In many cases, borrowers have 30-year fixed mortgages. So, one option is to refinance to a 15-year mortgage, which usually carries a lower mortgage rate. A borrower also can accomplish other goals with a refinance, such as switching over from an adjustable-rate mortgage to a fixed rate or moving from a government-loan program to a conventional loan.

There are pros and cons to each strategy.

Making additional payments on a home loan is the much more flexible option, and makes the most sense when the loan balance is small. When refinancing, borrowers can expect to pay at least 3 percent of the principal loan balance in closing costs. It will take some period of time for the borrower to break even after paying those costs.

Refinancing to a shorter-term mortgage will almost always increase the monthly payments, sometimes substantially. Before going that route, borrowers should be absolutely certain that they can make the higher payments and that their source of income is secure.

In general, however, refinancing an existing loan can be a better strategy when the owner has a substantial balance to pay down and plans to stay in the home for a long time, according to several experts.

As with other parts of the home-loan process, the borrower needs to evaluate their goals closely and crunch some numbers. Both the refinancing and extra-payment options can save a homebuyer thousands of dollars and shorten the loan term, but choosing the right option usually depends on a borrower’s unique goals and circumstances.

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