When you receive your monthly mortgage statement, you may have noticed the option of paying more than your required monthly payment. While paying extra principal on your mortgage won't decrease your required monthly payment like a credit card payment, there are several perks of making an extra annual mortgage payment.
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When you pay an extra mortgage payment annually you will:
- Pay less interest over the life of your loan
- Pay down your mortgage quicker
- Gain equity in your home at a faster pace
For example, let's say you have a 30-year fixed-rate mortgage in which you borrowed $200,000 at a 3.75 percent interest rate. The principal and interest portion of your mortgage payment would be $926.23. If you make the standard 12 monthly payments for 30 years, you will spend a total of $133,443 in interest.
If you make an extra annual mortgage payment and you stay in your home for the term of your loan, your extra annual payment will save you $19,261 in interest and will allow you to pay off your loan balance 3 years and 10 months earlier than scheduled.
Making an extra annual mortgage payment can be a good decision pending multiple factors, such as how long you plan to stay in the home, other debts you currently owe, etc. Consult with a mortgage banker about choosing the right path to paying down your mortgage.
For more information about home financing, download our free Mortgage 101 Handbook, a great resource for first-time and repeat homebuyers.