What will help to make an additional payment
It is thanks to the mortgage that most people buy their housing. You need to deposit a certain amount and take out a loan for the balance. Because you need a lot of money to buy a house or apartment, mortgages are issued for 15, 20, or even 30 years.
Most of the initial payments go towards paying off the interest. They may seem relatively high. It is due to a large body of lending. The interest rate goes down when you put money down to pay off your mortgage. That's why one extra mortgage payment a year will help pay off all financial obligations faster.
It is also necessary to know that the payments may include additional payments. For example, a company can take out PMI as reinsurance. The amount can be from 0.58% to 1.86% of the initial amount. It is essential to determine how many years does an extra mortgage payment take off. The sooner it can be paid off, the better.
An example of how an additional payment will help you save
It is better to understand how an extra mortgage payment a year works with an example.
Let's imagine that you have a mortgage of $275,000 at 4.5% for 30 years. It is necessary to pay 1393 dollars per month. You will finish paying it in November 2051. At the same time, the amount of overpayment will be $226,618. As you can see, the overpayment is almost equal to the loan amount.
But if paying one extra mortgage payment a year of $1,400, the loan can be closed 4.5 years earlier. At the same time, you will save about $40,000 in interest.
Not everyone has the ability to make 1 extra mortgage payment a year. It is a pretty severe amount. But there is a way out of such a situation. You can increase your monthly payment by $117. The mortgage term will be about the same if you pay $1,393 and $1,510. At the same time, you will save more money than by making one extra mortgage payment a year. The amount saved will be about $188,301. It is almost half the amount.
How to correctly make an additional payment
Paying extra mortgage payment a year will help you quickly settle with the bank. But it is essential to do it correctly to avoid worsening the situation. There are three options to do this:
increasing the size of the monthly payment;
making payments every two weeks.
To make it easier to make one extra mortgage payment per year, you should open a savings account. You can send a certain percentage of earnings, gift money, and bonuses there. This way, collecting the necessary amount to deposit funds will be possible.
Calculating how much should be added to the monthly payment is very easy. You need to divide the current amount by 12 and add it to the one you pay. This form of payment is more convenient than a large amount per year. At the same time, you will get the same consequences.
Some companies offer to make payments twice a month. The payment amount is divided into two parts that must be paid. But it is worth considering that lenders can change the terms of such a mortgage payment.
What you need to know about additional mortgage payments
By paying an extra mortgage payment a year, you can speed up expenses. But it should be remembered that some companies charge a penalty for early repayment. Therefore, it is worth having a reserve of money to close it. It should also be noted that the payments cover only the body of the mortgage.
Before deciding to make additional payments, you should assess your situation. If you can afford to deposit an extra amount, that's great. But if the financial situation does not allow it, it is better to abandon such a decision. You may find it more convenient to increase the monthly amount. Whether to pay strictly according to the mortgage plan. There is nothing wrong with that. The main thing is not to be late and deposit the required funds.
It is worth creating a piggy bank that will help avoid sudden payments. It is worth getting insured, even if you are sure of your financial stability.