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Save big with just one extra mortgage payment every year

By: Mitch Mitchell
June 7, 2023

There's a lot to think about when you're in the market for a new home. The most important is the mortgage payment. You're going to have to make 12 of them every year — unless you decide to make more!

At the beginning of your mortgage, a big chunk of your monthly payment goes towards interest, not to reduce the original amount you borrowed. To nip away at the principal loan balance, consider factoring in an extra payment towards your mortgage when you're figuring out your annual budget.

Here's why!


Making one extra payment every year…

…saves money on interest. 

When you make an additional payment, you have the option to apply it toward your loan's principal. This will gradually chip away at your loan balance and could ultimately reduce the amount of interest you pay over time.

As your loan balance decreases, the amount of interest added to each payment also drops. It's not much at first, but it can add up to significant savings over time. Over time, you could save thousands of dollars in interest and reduce the total time you'll have to make those monthly payments.

…builds equity faster.

Another great reason to make that extra mortgage payment is that it speeds up the home equity you're building. As you reduce your loan balance, your equity in the home increases, provided that the home's value remains the same or increases over time.

Having equity built up in your home is like having money in the bank — it increases the value of your investment and can bump up your profits when you decide to sell in the future. Plus, having equity gives you the option to take out home improvement loans if you need them.

And, since you'll probably pay private mortgage insurance (PMI) if you have less than 20% equity in your home, making extra mortgage payments can help you reach that threshold sooner, so you can potentially eliminate PMI depending on what financing or loan program you apply for.  This could  save you even more each month.

…allows you to own your home even faster.

Just one extra payment per year can make a significant impact on the length of your loan, maybe even reducing the term by years. That means you'll be free of having a mortgage payment much sooner than expected. Imagine all the things you could do with those extra dollars once you're no longer making mortgage payments — whether it's paying for college tuition, taking a dream vacation or purchasing a second home.

Even if your goal is simply to become debt-free, making additional mortgage payments can help you get there faster. 


Save big with just one extra mortgage payment every year


Next, determine how much you can afford to pay and when. 

First, check with your loan officer to ensure that your mortgage doesn't carry prepayment fees. Such penalties typically apply to larger pay-downs — not smaller incremental payments as we're discussing here, but it's better to be safe than sorry. 

Just make sure they're aware that any additional payments are to be applied to the loan's principal rather than being applied toward future payments.

Then, discuss the options for how to make any extra payment. Here are the most common ways to do that:


Pay a lump sum

A lump sum payment is a one-time payment that can be made at any time, but many homeowners choose to make these payments when they receive extra income, such as a bonus or tax refund.  

Keep in mind that there may be limitations on how much you can pay in a lump sum or how often you can make these payments, so double-check with your lender beforehand.


Add a little extra every month

A slightly less painful method is to divide your regular mortgage payment by 12, and then add that amount to each monthly payment. 

For example, if your monthly mortgage payment is $1,800, divide that by 12 months, and you get $150. That's what you'd add to each monthly payment to be applied directly to the principal of the loan. 


Shave years off your mortgage!

As a general rule of thumb, making one extra mortgage payment per year at the start of your 30-year mortgage can shorten the term by approximately four to five years. You could potentially pay off the mortgage and own the home outright in 25 to 26 years instead of 30. 


Be sure you're good to go financially.

Before deciding to make extra mortgage payments, be sure you have your financial priorities in order. If you have other high-interest debts, it may be wiser to pay them off before making extra mortgage payments. Or, if you have a 401(k) that needs funding, consider putting your extra money towards that instead.

Another crucial factor to consider is having an emergency fund. It's recommended that you have at least three to six months' worth of living expenses saved so you're financially protected in case of unexpected emergencies or job loss.


Check with your loan officer!

Remember, even one extra mortgage payment per year can make a big difference in the long run, especially if started early on in the loan. With time, these additional payments add up and can help you achieve your longer-term mortgage financial goals.

If you're ready to start making extra mortgage payments — or about to take out a home loan — and want to learn more about potential savings, reach out to a Movement Mortgage loan officer in your area who can help. 

black and white photo of Mitch Mitchell
Author: Mitch Mitchell

Mitch Mitchell is a freelance contributor to Movement's marketing department. He also writes about tech, online security, the digital education community, travel, and living with dogs. He’d like to live somewhere warm.