Paying more towards your mortgage will obviously save you money, because you pay less interest over the life of the loan. This Investopedia.com video clearly explains the concept of a mortgage and how paying it off earlier reduces the cost of the house. All in under two minutes!
While reducing the interest you pay is beneficial, did you know there are two more advantages to paying more towards your mortgage every month? Well, there are and I’m about to share them with you.
1. Larger equity value
By paying down your principal amount on your home loan, you gain more equity. Equity is the difference between the current market value of a property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.
In the early years of homeownership, equity provides you with a cushion in case home values decline. If you decide to sell, the extra equity value in your home will provide you more cash after the close of escrow. If the home value appreciates on top of the mortgage payment acceleration, your equity value grows even more.
2. More money in your pocket when you’re older
Another advantage to paying additional money towards your monthly mortgage payments is the money available after the mortgage is paid off. You shorten the length of your mortgage when you pay additional towards your monthly mortgage. This provides extra money available to your budget sooner, because you no longer have a mortgage. It’s a major benefit that most people often overlook.
Let’s look at an example. Use this mortgage calculator to do some quick calculations.
Say you take out a 30-year $200,000 mortgage with an annual interest rate of 4%. Under those conditions, you pay $955 a month for the next 360 months, which adds up to $343,739 in total. Now, if you pay an extra $100 a month, the calculator says you pay a total of $316,884, saving $26,855 in interest. Also, you shorten the mortgage term by almost five years, from 360 months to 301.
Two additional advantages to paying off a mortgage faster are increasing equity value and having more money later on in retirement. More equity today allows for more income later, when its needed most.
Paying more towards your mortgage
Are you paying more towards your mortgage every month? I’d love to here your motivation and strategy in the comments below.