How Advantageous Is Making an Extra Mortgage Payment?
by Mary Gallagher
You can turn your 30-year loan into a 28-year loan with one early principal payment.
If you remain in the loan for its full term or most of the term and make extra payments on your mortgage, you will shorten the length of the loan and reduce its total cost. The higher the interest rate and the longer you stay in the loan, the more you will save. For example, if you have a 4 percent fixed interest rate on a $200,000 loan and make one $500 payment toward principal once a year, you will save a total of $12,190 in interest payments over the life of the loan and it would end just over 2 years earlier. If that same loan were at 6 percent, you would save $22,830 and the loan would end a full 2.5 years earlier.
The sooner you make extra principal payments, the more you save in interest. If instead of
making an extra $500 payment once a year for 27 or 28 years you make just one principal payment of $10,000 in the second year of a $200,000 loan at 6 percent, you would save $41,044 over the life of the loan and the loan would be paid off in 26.5 years.
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