“A penny saved is a penny earned.” While a penny is an insignificant amount of money, the habit of saving is a big deal.
The same can be said about the way you pay your mortgage. One payment out of the many you promised to make over the 30-year life of your loan can seem small in the grand scheme of things…but it’s not.
My job as a mortgage educator is to prepare you for what happens BEFORE and AFTER you purchase your home. Understanding the financial mechanism that governs your mortgage will allow you to take financial strides that help secure a more promising future for yourself and your family.
With that in mind, I want to offer a few examples to show you why it is wise to try to make an extra mortgage payment annually.
If you’re a first-time homeowner, you may be surprised by all the expenses—mortgage insurance, property taxes, costs for repairs—of owning a home. The thought of making another home-related payment may not sound too great.
But making one extra payment per year can have a huge financial impact. Here’s how:
Save big on interest dollars: Through the amortization process, a chunk of your monthly mortgage goes toward interest. You can make a bigger dent into the amount of interest you owe by simply lowering your principal balance, which can be accomplished through making 13 mortgage payments a year. This will lower the amount of interest added each month, which can result in savings at payoff time.
Boost equity: Paying a mortgage is like dropping money into your very own piggy bank. It’s an investment with the potential for big-time dividends. As you reduce the principal amount on your loan, you are helping your equity increase (assuming home values continue to increase steadily). This built-up equity provides additional financial security, which will come in handy if you decide to sell your home or secure a second mortgage for cash or home improvements.
Pay off loan earlier: If you’re like many financially prudent people, you know that it’s always better to be early than late. Paying a little extra each year will allow you to pay down your mortgage faster. In fact, you can shed around three to four years or more off your financial commitment. If you plan on doing some traveling upon retirement, for example, those few extra years of savings can truly pay off.
Regardless of where you stand today, it takes only a small increment to enjoy some benefits down the road. Homeownership is an investment, and if you’re strategizing about ways to maximize your wealth, this is one tremendous way to do it.