How many years does one extra mortgage payment take off?

Accelerating Mortgage Repayment: How Extra Payments Can Shave Years Off Your Loan

Making extra mortgage payments is a wise financial move that can have significant long-term benefits. By dedicating a portion of your monthly budget to additional payments, you can accelerate the repayment process, reducing the overall cost of your loan and building equity faster.

How Many Years Does an Extra Payment Take Off?

The number of years you can shave off your mortgage term depends on several factors, including the loan amount, interest rate, and the amount of your extra payments. As a general rule, making one additional mortgage payment per year can shorten your loan term by four to six years.

This acceleration is due to the compound effect of interest. When you make extra payments, they are applied to both the principal and the interest. By reducing the principal, you decrease the amount of interest charged on the loan. This, in turn, reduces the total amount of interest you pay over the life of the loan.

Example:

Consider a 30-year mortgage of $250,000 with an interest rate of 4%. Making an extra payment of $500 per year would shorten the loan term by approximately 5.5 years. This would result in a total interest savings of over $25,000.

Additional Benefits of Extra Payments

In addition to shortening the loan term, making extra mortgage payments also offers several other benefits:

• Reduced total interest paid: As mentioned above, extra payments reduce the principal balance faster, which in turn reduces the amount of interest charged on the loan.
• Accelerated equity growth: Equity is the difference between the value of your home and the amount you owe on your mortgage. Making extra payments increases your equity faster, giving you more financial flexibility and potential for future profits.
• Peace of mind: Knowing that you are paying down your mortgage faster can provide peace of mind and a sense of financial security.

Conclusion

Making extra mortgage payments is a smart financial strategy that can significantly accelerate the repayment process, reduce the total cost of your loan, and build equity faster. By dedicating a small portion of your monthly budget to this proactive measure, you can save thousands of dollars in interest and shave years off your mortgage term.