Is it worth it to make just one extra payment a year on your 30 year mortgage?

One Extra Mortgage Payment a Year: Small Change, Big Impact?

The prospect of a 30-year mortgage can feel like a lifetime commitment. While monthly payments are designed to amortize the loan over that timeframe, many homeowners wonder about strategies to shorten the term and save on interest. One popular approach is making one additional principal payment each year. But is this single extra payment truly worth the effort? The short answer is: probably yes.

Accelerating your mortgage payoff, even incrementally, offers compelling financial advantages. A single extra payment annually, applied directly to your principal balance, can shave years off your loan term and save you thousands of dollars in interest. This seemingly small act generates a snowball effect, compounding your savings over time.

Here’s why that one extra payment can make a big difference:

• Faster Equity Growth: By chipping away at the principal faster, you accelerate the rate at which you build equity in your home. This strengthens your financial position and provides a greater sense of ownership.

• Improved Loan-to-Value Ratio (LTV): A lower LTV indicates a lower risk for the lender. This can translate to better interest rates on future loans or refinancing options, and may even allow you to eliminate private mortgage insurance (PMI) premiums sooner, saving you even more money each month.

• Substantial Interest Savings: The biggest advantage is the reduction in total interest paid over the life of the loan. Interest is calculated on the outstanding principal balance, so by reducing that balance more aggressively, you significantly decrease the amount of interest accrued over time. Even a single extra payment annually can have a surprisingly significant impact on the total interest paid.

• Psychological Boost: Beyond the tangible financial benefits, making an extra payment can provide a psychological boost. Knowing you’re actively reducing your debt and building equity faster can provide peace of mind and a sense of accomplishment.

A Crucial Caveat: Confirm with Your Lender

Before making any extra payments, it’s crucial to contact your mortgage lender. Confirm that the extra payment will be applied directly to the principal balance and not towards future monthly payments. Some lenders require specific instructions or may have different procedures for processing extra principal payments. Ensure there are no prepayment penalties associated with making extra payments.

Is it right for you?

While making an extra annual payment is generally a sound financial strategy, it’s essential to consider your individual circumstances. If you have high-interest debt, such as credit card balances, it might be more beneficial to prioritize paying those down first. However, if you’re financially comfortable and looking for a relatively simple way to boost your long-term financial health, making one extra mortgage payment a year can be a powerful tool. It’s a small change that can yield significant long-term rewards.