Is it better to pay lump sum off mortgage or extra monthly - Cain Mortgage Team (2024)

FAQs

Is it better to pay lump sum off mortgage or extra monthly - Cain Mortgage Team? ›

Nearly all mortgages allow the homeowner to make additional payments monthly or in a lump sum towards your principal. Regardless of the amount of funds applied towards the principal, paying extra installments towards your loan makes an enormous difference in the amount of interest paid over the life of the loan.

Making a lump-sum payment always saves you money on interest. Depending on how you handle it, the payment will either shorten the time it takes to pay off your mortgage or reduce your monthly payment amount.

Paying a lump sum off your mortgage will save you money on interest. It will also help you clear your mortgage faster than if you spread your overpayments over a number of years. But this option holds risk. If you needed the money back in an emergency, such as job loss, it could be difficult.

Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you'll pay.

Rather than delaying credit until the next month, the optimal day within the month to make an extra payment is the last day on which the lender will credit you for the current month.

Will my mortgage payments go down if I pay a lump sum? Your recurring monthly mortgage payment will remain the same even when you submit an additional payment or lump sum unless you recast your loan.

Paying lump sums every year saves you money over the course of your mortgage². If you pay more than the amount of your annual prepayment privilege, you may have to pay a prepayment charge. on the excess. Take advantage of extra cash, such as your tax refund or work bonuses.

Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.

The advantage of overpaying is that money will not only be taken off the total, but also interest will not have to be paid. Adam French of NerdWallet, a financial advice site, says that the higher the rate, the bigger the savings with an overpayment.

What happens if I pay $500 extra a month on my mortgage? ›

Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.

The Downside of Mortgage Prepayment

Prepaying your mortgage ties up your funds in your home, potentially leaving you with less liquidity for other financial needs or opportunities.

When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).

Options to pay off your mortgage faster include:

Pay extra each month. Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.

If you buy a $300,000 house with a 30-year mortgage and a 5.7% interest rate, you could save $84,223 in interest by paying an extra $200 every month — and pay off your mortgage 6.67 years sooner.

The key is to specify to your lender that you want your extra payments to be applied to your principal. If you don't make this clear, you may find the extra payment going toward the interest you owe rather than the principal.

Overpaying your mortgage could help you cut your loan-to-value (LTV). This is the proportion of your property price covered by your mortgage. It goes down if your property value goes up and as you pay off more of your mortgage. That's why overpaying can help bring it down.