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How to pay down your mortgage faster.

Most mortgages provide you the option to pay extra on your principal if you wish. The benefit in taking this approach is that it will, over the life of the loan, reduce the total amount of interest you pay. Before you make extra mortgage payments, you will want to evaluate your situation to see if it will benefit you.

Should You Make Extra Mortgage Payments?

In many cases, while it’s a good option, it may not be the best. That’s because there’s an opportunity cost involved: if you pay extra money toward your principal, you can’t use that money for anything else. Here are some pros and cons to help you decide if extra mortgage payments are for you:

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Alternatives to paying off your mortgage early.

Depending on your situation, these may be better uses of your money than paying down mortgage principal early.

  • Your rainy-day fund. Emergencies can put an enormous strain on your budget if you don’t have anything set aside to pay for them. It’s ideal to have somewhere between three to six months’ worth of your household take-home pay set aside to help you deal with the unexpected. Build up your emergency fund in a savings or money market account before paying extra on your mortgage.
  • Your 401(k). If your employer offers any kind of match on your contributions to your 401(k), ensuring you’re getting the full match amount is an absolute must. In most cases, you’ll earn much more from your 401(k) contributions in the long run than you would save by paying extra on your principal.
  • Your monthly budget. Saving on mortgage interest is great, but if it makes your monthly budget too tight, it may not be worth it. Pay your monthly bills first.
  • Paying off your loans. You can reduce your debt in other ways such as paying off your student loans, car loans or even credit card debt.
  • Home improvements to improve your equity. Home improvements increase the value of your home significantly. This could help your home sell faster in the future and increase the chances of you getting more money for your home in the future.
  • Investing the money. If you have a low mortgage rate, it may not make sense to pay off your mortgage early when you could invest that money instead at a higher rate.

If you do elect to pay extra toward your principal, it’s important to note that you usually have to earmark the extra money for that purpose. Otherwise, it may get applied to your mortgage as a whole. The method for earmarking your additional payment is usually simple, but it varies by lender, so be sure to ask for instructions.

Under the right circumstances, paying extra principal can result in considerable savings, and can allow you to pay off your mortgage well ahead of schedule.

If you do choose to pay extra on your principal, there are several options to consider.

  • Budget for an extra payment each year. Setting aside money to pay an extra payment can save you money in the long run.
  • Send extra money to the principal each month. Your lender will know how this works in terms of payments that go over the amount of your monthly bill. The extra money should be applied to the principal. Discuss with them before you start paying extra on the principal.
  • Refinance your mortgage. If you are able to secure a lower interest rate than what you currently have, you can save money over the life of your loan. However, doing this may lengthen the number of years you have to pay, depending on the length of the term you choose.
  • Consider an adjustable-rate mortgage. This may make good financial sense if you only plan to live in your house for a short amount of time or plan to pay off your mortgage early, before interest rates can rise. ARMs are not fixed-rate loans and the interest rate could adjust over time, but there are interest rate caps in place to help protect consumers.

Still have questions? We’re here to help! Feel free to contact us or call us at 816-760-3663 to reach a mortgage banker.

Need a mortgage? Learn more about Commerce Bank Mortgage.