PAYOFF IMPROVEMENT
Payoff date: 0 months earlier, saving $0 in interest
Adding extra payments can significantly reduce your loan term and interest costs.
Is there any downside to paying extra?
Making extra payments toward your mortgage principal can be a great way to save money on interest and pay off your loan faster. However, there are some potential downsides to consider:
- Opportunity cost - The money used for extra payments could potentially earn a higher return if invested in stocks, bonds, or other investment vehicles
- Liquidity concerns - Money put toward your mortgage is not easily accessible in case of emergencies
- Prepayment penalties - Some loans have prepayment penalties that reduce or eliminate the savings from extra payments
- High-interest debt - If you have credit cards or other high-interest debt, it's usually better to pay those off first
Should I make biweekly payments?
Biweekly payments can be an effective strategy to pay off your mortgage faster:
- How it works - Instead of making one monthly payment, you make half a payment every two weeks. This results in 26 half-payments per year, which equals 13 full payments rather than 12
- Interest savings - By making the equivalent of one extra payment per year, you can significantly reduce the life of your loan and total interest paid
- Bank vs. lender programs - Some banks offer biweekly payment programs for a fee, but you can achieve the same result by simply dividing your monthly payment in half and paying every two weeks directly to your lender
- Considerations - Make sure any biweekly program is legitimate and doesn't charge unnecessary fees. Verify with your lender that extra payments are applied to principal
What about mortgage prepayment penalties?
Some mortgages include prepayment penalty clauses, but they're becoming less common:
- What is it? - A prepayment penalty is a fee charged by the lender if you pay off your mortgage earlier than scheduled, usually within the first 3-5 years of the loan
- Types - Hard penalties apply to both sales and refinancing. Soft penalties only apply if you refinance
- Check your loan terms - Review your mortgage documents to see if there's a prepayment penalty clause
- Amount - Typically 2-5% of the outstanding loan balance or a percentage of interest
- FHA/VA loans - These government-backed loans generally don't allow prepayment penalties
- Alternatives - If you have a prepayment penalty, consider making partial prepayments that don't trigger the penalty or wait until the penalty period expires