When purchasing a home, it’s critical that you don’t bite off more than you can chew in regards to your mortgage. If your payment is too high, it’ll put unnecessary financial stress on you and your budget.
As you settle into your new home, you may come to realize that you have the ability to pay extra on your mortgage. But before you do so, you have a question to answer: is it a good idea?
The answer varies from person to person, but there are two big benefits of paying extra on your mortgage:
1. Save on Interest
Interest is calculated on your remaining mortgage balance. So, the quicker you pay down your balance, the less interest you’ll pay over the life of your loan.
Even if you only pay a few extra dollars here and there, it’ll add up over the course of the year (and the next year and so on).
If your goal is to save money, putting extra toward your mortgage will allow you to do just that over the long run.
2. Shorten the Term of Your Loan
Most people dream of the day when they’re able to live mortgage free. But of course, reaching this milestone is easier said than done.
Even if you have a long period left on your mortgage — such as 25 years — you don’t have to wait this long to pay off your home. By paying extra on your mortgage every month, you shorten the term of your loan. So, instead of waiting 25 years, maybe you’re able to reach your goal within 20 years.
Points of Consideration
With benefits like these, it’s natural for you to want to pay as much extra on your mortgage as you can. But before you do that, there are a few points of consideration:
- Prepayment penalty: Check with your lender to ensure that there’s no prepayment penalty associated with your loan. If there is, learn how it works so that you’re able to manage this fee accordingly.
- The impact on your budget: Despite the benefits of paying extra, you don’t want to do so if it’ll put strain on your monthly budget. If you need this extra money for other expenses, don’t throw it at your mortgage.
If you’re financially able to pay extra on your mortgage, do the calculations to determine how much money you can save and how quickly you can pay off your loan.
In the end, you may find that paying extra on your mortgage is one of the best financial decisions you can make.