Have you been thinking about building a little extra padding into your monthly mortgage payment? Or perhaps you've come into some extra funds and now you're wondering, "can I add more money onto my mortgage?" If so, you're making a move many homeowners have made and for good reason. It's a strategic way to pay off your home faster and save on interest.
Before you start writing checks, let's look at the pros, cons, and how-to's of accelerating your mortgage payments. This should give you a well-rounded picture of what's involved.
Understanding Mortgage Payment Acceleration
Mortgage payment acceleration, or "making extra mortgage payments," refers to the practice of paying more than your scheduled monthly payment towards your mortgage loan. This can be made through regular payments, lump sums, or a combination of both.
It's a great way to reduce your interest expenses and shorten your loan term. However, it's not one-size-fits-all. It might not always make immediate economic sense, and there are a few things to consider before you dive in.
Advantages of Accelerating Your Mortgage Payments
1. Reduced Interest Expenses: By paying off your loan faster, you'll pay less in interest. It's a simple arithmetic fact that more money up front results in less money spent over time.
2. Shorter Loan Term: This seems obvious, but consider the long-term benefits. The shorter your loan term, the more equity you build in your home, the more financial flexibility you have, and the less risk there is of having a significant amount of debt as you age.
Disadvantages and Alternatives to Consider
1. Opportunity Costs: While putting extra money towards your mortgage might be a financial win in the long run, are you overlooking better opportunities for your money? Consider other investments that could potentially earn a higher return.
2. Flexibility: Suppose an emergency arises that requires cash. If your money is tied up in your mortgage, you might not have the flexibility you need. Be sure to weigh this against the potential benefits of accelerating your payments.
Alternatively, you might want to consider a financial vehicle that offers both the earning potential and the liquidity you need, like a high-yield savings account or a money market account. Or you could decide to invest in something riskier with a higher potential return, like the stock market. Weigh your risk tolerance, goals, and timeline when deciding where to put your extra money.
How to Add More Money onto Your Mortgage
Now that you have the background let's dive into the practical side of how to make extra mortgage payments.
First and foremost, you need to ensure that your mortgage agreement allows this. Many lenders allow extra payments without penalty, but some may charge a prepayment fee or have restrictions on how often or how much you can pay over.
Check Your Contract
Before you make your extra payments, find a copy of your mortgage agreement and read the fine print. Look for clauses that mention prepayment, extra payments, or acceleration. If you're unsure, contact your lender directly to confirm.
If prepayment penalties do apply, consider whether waiting until they're waived would be worth it. Some lenders may waive these penalties after a certain period or if you have built equity in your home.
Make the Payments
Once you've done your homework (and possibly chatted with your lender), you're ready to start.) If you're planning to make regular, extra mortgage payments, set up automatic payments from your bank to your lender. This ensures that the money gets there without you having to think about it every month.
If you're planning to make lump-sum payments, ensure that your lender treats them as additional principal payments, not as advance payments for future installments. This ensures that your loan term is actually being shortened.
Finally, touch base with your lender periodically to ensure that your extra payments are being applied correctly. It's not uncommon for lenders to have some back-end technicalities that they need to work out. Better to be on top of it now than to realize later that your extra payments didn't have any effect.
Adding extra money onto your mortgage can be a smart strategic move, but it's not always the right one. Carefully consider your personal financial situation, your goals, your risk tolerance, and your timeline before making a decision. And remember, while it's important to pay off debt, make sure you're not shortchanging yourself in other areas, like saving and investments.