If you have room in your budget (or a lump sum of cash), making extra mortgage payments may help you in several ways. You can save a substantial amount in interest, and eliminating debt provides flexibility in life. But paying extra on your mortgage isn’t the only way to reach your financial goals, and it might not always be the right move.
Why Pay Extra?
Reduce interest costs: Although mortgage loans usually have relatively low interest rates, the loan balances are significant. Over time, you pay a surprising amount of interest, and most of your interest costs come in the early years of a long-term loan.
Eliminate debt: In addition to saving money, you buy flexibility when you pay down debt. With your mortgage loan paid off, it’s easier to go into retirement on a fixed income or start a business without worrying about monthly payments. Being debt-free provides the freedom to choose different paths in life.
Example: Assume you get a $200,000 30-year fixed-rate loan at 4.1 percent. Your monthly payment is $966.40.
- Interest savings: Over the life of your loan, you pay over $147,000 in interest costs. That’s on top of the $200,000 loan that you have to repay. But if you pay an extra $100 per month, you’d pay roughly $27,000 less in interest.
- Early payoff: By paying an additional $100 per month, you pay off your loan approximately five years early. For the remaining five years, you can redirect that money toward other goals or work less because you don’t need as much income.
Even if you don’t stay in the same home for 25 years, a 25-year habit of paying extra should bring similar benefits. You’ll spend less on interest, and you’ll have more equity for your next home purchase.