When it comes to your mortgage, making extra payments can have a significant impact on your loan term and overall financial well-being. Even a small additional payment per month, such as $100, can make a big difference in the long run. Let’s explore what paying $100 extra on your mortgage means for you.
1. Reducing the Principal
By paying an extra $100 each month, you will be able to reduce the principal balance on your mortgage at a faster rate. This means that a larger portion of each subsequent payment will go towards paying off the principal, rather than interest.
| Payment | Principal | Interest | Total |
|---|---|---|---|
| Regular Payment | $500 | $500 | $1,000 |
| Payment with $100 Extra | $600 | $400 | $1,000 |
In the example above, without the extra $100 payment, the regular payment of $1,000 is split equally between the principal and interest. However, with the additional $100, a larger chunk of the payment goes towards reducing the principal balance.
2. Saving on Interest Payments
Reducing the principal balance faster also means that over the life of the loan, you will save significantly on interest payments. The less time your mortgage spends accruing interest, the less you’ll end up paying in the long run.
Let’s take a look at a hypothetical scenario:
- Mortgage Balance: $200,000
- Loan Term: 30 years
- Interest Rate: 4%
Without any additional payments, the total interest paid over the course of the loan would be around $143,739. However, by making a consistent extra $100 payment every month, the interest paid reduces to approximately $108,640, resulting in a savings of over $35,000!
3. Shortening the Loan Term
Another significant benefit of paying an extra $100 on your mortgage is the acceleration of your loan term. By consistently making this extra payment, you can shave off several years from your mortgage.
Using the previous example, if you started with a 30-year loan, the additional $100 payment each month could shorten the term to around 24 years and 7 months. That’s over 5 years saved by simply making a small additional payment!
4. Building Equity Faster
Equity is the difference between the market value of your home and the remaining balance on your mortgage. Making extra payments can help you build equity at a faster pace.
Increased equity provides multiple benefits:
- Allows you to potentially qualify for a lower interest rate
- Gives you a larger down payment for future real estate investments
- Provides a safety net of value in case of financial emergencies
5. Freedom from Mortgage Debt
Perhaps one of the most compelling reasons to pay an extra $100 on your mortgage is the freedom it brings. By reducing your principal balance, saving on interest, and shortening the loan term, you can pay off your mortgage ahead of schedule.
Imagine having your home completely paid off several years earlier than expected. This financial freedom allows you to allocate your resources in different ways, such as saving for retirement, investing in other opportunities, or simply enjoying a mortgage-free life.
Remember, every little bit counts when it comes to paying off your mortgage faster. Your $100 extra payment each month can make a significant impact on your financial future. So, consider making that extra effort and watch your mortgage balance decrease faster than ever before!
Frequently Asked Questions For What Does Paying 100 Extra On Mortgage : Secrets To Saving
What Are The Benefits Of Paying Extra On Your Mortgage?
Paying extra on your mortgage can help you save on interest payments and shorten your loan term.
How Does Paying 100 Extra On Your Mortgage Affect The Payoff?
By paying an extra $100 towards your mortgage each month, you can reduce the overall interest paid and potentially shorten your loan term by several years.
Can Paying Extra On Your Mortgage Help Build Equity Faster?
Yes, when you make additional payments on your mortgage, it helps to build equity in your home at a quicker pace.
Is It Better To Pay Extra Towards Principal Or Interest?
It is generally more beneficial to pay extra towards the principal balance of your mortgage, as this reduces the overall amount owed and saves on interest over the life of the loan.
Ismail Hossain is the founder of Law Advised. He is an Divorce, Separation, marriage lawyer. Follow him.
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