While not every borrower can schedule extra payments with standard frequency, extra payments can come from other sources. Consumers without a regular source of additional funds have other options for taking advantage of mortgage cycling, such as using tax refunds or cutting back on luxuries.
Bi-weekly payments are another popular way to pay extra on a mortgage. Given that there are 12 months and 52 weeks in a year, paying 26 bi-weekly payments is like paying 13 monthly payments, with the 13th payment going entirely toward the principal of the loan.
Finding the Extra Funds
Many homeowners do not consider making additional payments because they believe their budgets will not provide for extra funds. Yet, these same individuals may use credit cards to purchase big-ticket items such as televisions or the latest smart phone. They may not stop to calculate the monthly expense of a morning latte and scone. $6.00 spent every day on the way to work totals $120 monthly. A thorough analysis of the monthly budget can reveal many ways to save money that may be applied to the mortgage.
Tax refunds represent another source of additional funds to make payments on a home loan. Many taxpayers receive sizable refunds. These funds can be dedicated to the loan easily. Other sources can come from financial awards or settlements from insurance companies.
The speed at which a home loan can be retired varies depending on the extra amount paid and when it is applied to the principal. Making larger payments earlier in the term will save the borrower a considerable amount of interest. For example, for a $160,000 loan with 7 percent interest for 30 years, the payment would be $. Of that, only $ is principal, and $ is interest. If the consumer pays an additional amount equal to the principal, an entire month of the duration of the loan is eliminated.
Practicing this discipline on a monthly basis would reduce the standard 30-year loan to 15 years. However, as the loan progresses, the ratio of interest and principal inverts so that eventually the principal represents the majority of the payment. A borrower continues to match the principal amount with an additional payment. In the example above, after one year of additional payments, the principal amount would increase to $. Thus, most homeowners should plan to adjust the budget as the loan matures.
While analyzing the various methods of making extra mortgage payments, consumers should consider their individual financial status. Some consumers ounts from savings accounts can save thousands of dollars in interest expense on the mortgage. Yet, many financial advisors would caution against an overly aggressive application of this approach. Having a cushion of savings protects against unforeseen expenses and can provide financial security during times of economic difficulties. Stocks, bonds and other liquid assets can be sold to make additional mortgage payments. A careful analysis of the lost return on investment in comparison to the savings in interest should be taken into account. In addition, a consumer may wish to pay off high interest credit cards prior to applying additional funds to a mortgage. This may prove to be a better strategy as interest on mortgages is tax deductible whereas interest on unsecured credit is not tax deductible.
If the borrower cannot count on steady sources of additional funds, simply setting aside extra cash throughout the month for extra payments will still lower the total cost of interest paid. The amount can fluctuate from month to month.