When it comes to paying down a mortgage, budgeting is a very important area for homebuyers. Failing to stay within a budget may risk missed payments or other issues that can reflect badly on their financial profile, while those who are diligent and disciplined will leave themselves in good shape – and if you go the extra mile, a mortgage can even become a fantastic financial asset.
At City Creek Mortgage, we’re here to help you buy a home that becomes a positive investment for you in the long run. One strategy for doing so? Making one extra mortgage payment each year as part of your budget. Let’s go over the various formats you can use while doing this, plus how this practice will benefit you over time.
Ways of Doing It
There are a few different ways of making an extra yearly mortgage payment:
- Boosting each monthly payment: Take your extra payment amount, then divide it by 12. From here, just add that amount to each monthly payment – be sure to specify that this additional amount is to be applied to your principal balance, not interest.
- Bi-weekly payments: Instead of making one monthly payment, take that same amount, divide it in half, and then pay that amount every other week instead. Over the course of the full year, this will result in you making exactly one extra payment toward your principal amount, due to the fact that most months are slightly longer than four weeks.
- Single lump sum: Spend the year budgeting and saving up a full additional monthly payment, then determine a date when you send it in full. Again, specify that this extra payment is meant to go toward principal only.
Why Do It?
If you have the financial flexibility to use any of the methods detailed above, you should absolutely consider it. Benefits might include:
- Generating equity: The higher a percentage of your home that you “own” (that you’ve paid off, in other words), the more equity you have in it. This means that you get more profit if you choose to sell, and equity can also be used as a way of creating additional financing for home improvement or other areas. Extra yearly payments build equity faster for you.
- Paying less interest: As we noted above, you’ll be ensuring your additional payments go toward your principal loan balance. This will lower the amount of interest you pay, as interest is generated as a percentage of the principal amount remaining. Over the life of the loan, you can save thousands of dollars this way.
- Paying off early: Through a single extra yearly payment, you’ll likely pay off your mortgage several years earlier than you would have otherwise. This frees you from monthly payments faster, plus as we noted, saves you interest.
For more on how making extra mortgage payments benefits you, or to learn about any of our mortgage loan services, contact the pros at City Creek Mortgage today.