An annual supplementary mortgage payment might have a number of significant financial advantages at a comparatively moderate cost.
One extra annual mortgage payment not only speeds up the process of paying down your loan, but it also lowers your overall mortgage interest payments and increases your equity faster.
Here are the three main advantages of contributing one more mortgage payment year.
Increase equity faster
Building equity in your house is also facilitated by increasing your principle payments. The amount that you owe on your mortgage and the value of your home together make up your home equity.
You can develop equity by paying off your mortgage principal, even though there are situations where changes in your neighborhood’s overall property values are beyond your control.
If the value of the home rises or stays the same, as you reduce the amount of your loan, the disparity between what you owe and what it is worth increases.
Adding one more mortgage payment to your annual income allows you to accumulate equity faster. Your loan-to-value ratio will decrease as a result of increasing your principal payment (LTV).
Simply confirm with your mortgage lender that the additional payment you are making is going toward principal rather than principal and interest.
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Save interest costs
Amortization occurs on fixed-rate mortgages. This implies that while the amount of your monthly payment that goes toward interest drops over time, the amount that goes toward the mortgage principal increases.
You still make the same monthly installments for the duration of the loan. Payments for interest are primarily applied to the main balance during the first years of a 30-year mortgage.
However, the amount of your loan that remains will determine how much interest you pay each month. In other words, any extra money you put toward your principle will accelerate the reduction of your total amount owed on the loan as well as the amount of interest you pay.
For example, if a homeowner with a $300,000, 30-year mortgage only makes the required $2,002 monthly payments, they will pay $420,704 in interest over the life of the loan at a fixed interest rate of 7.03%.
But making an additional $2,002 a year would not only cut down on six years of payments but also lower the total amount of interest paid to $321,231 throughout the course of the loan, saving the homeowner close to $100,000 in interest over time.
Read Also: Unlocking Home Equity: Why High Interest Rates Make It Tricky
Take years off of the repayment period
If you own a home, you most likely have a 30-year mortgage, just like almost 90% of Americans do. Although the monthly payment on a 30-year loan is less than that of a 15-year mortgage, the loan must be repaid over the course of several decades.
Your mortgage payback period can be shortened by many years if you send an additional payment to your mortgage each year, for a total of 13 payments instead of 12.
With this method, the precise length of time you remove from your repayment term is determined by the interest rate, remaining payment term, and balance of your home loan.
Your annual extra payment will have a greater effect the higher each of these elements is. Sending one extra payment a year can have a significant impact on how long it takes to pay off your mortgage, even if your balance, remaining payment period, or interest rate are all lower.
