Curious to Know If You’ll Save Money Just By Making Your Monthly Mortgage Payments Early?  

Can You Save Money By Making Monthly Mortgage Payments in Advance?

A home mortgage is an investment. At times, it can seem daunting, knowing that you have many years of payments ahead. And it’s entirely possible that several times in the past, you may have wondered: Can I save money by making my regular monthly payments early? Can I circumnavigate added interest cost?

Well you’re not alone; many homeowners have had similar thoughts about their mortgage payments. Here’s the bottom line: making early monthly mortgage payments does not directly save you any money. But you may be wondering: are there exceptions to the rule?

Exceptions to the Rule: Save by Paying Early on Your Mortgage

It’s true that generally you won’t save any money by making an early monthly mortgage payment. However, there are two exceptions to the rule.

The first way you can save money by making your regular monthly mortgage payments ahead of time: if you have a simple interest mortgage, you can in fact save by paying early. Simple interest mortgages accrue interest daily. On these loans, such as a home equity line-of-credit, delaying payment increases the interest cost. In effect, the earlier you pay a simple interest mortgage, the more interest cost you can save.

Curious if you have a simple interest mortgage? If your monthly payment varies month to month, that’s a sure sign that you have a simple interest mortgage, and you can save by paying early on your home loan.

The second exception: if you make more than a single mortgage payment each month, you can save money by paying your mortgage early. In most cases, when you have a second mortgage payment, the secondary payment goes towards reducing the loan’s principal. Consequently, by reducing the principal on your loan, you are able to save money by paying early on your mortgage.

Early Mortgage Payment Benefits

So what if you don’t have a simple interest mortgage or the ability to make bi-monthly mortgage payments? Are there still ways to save on your mortgage by paying early? Whether you’re ready to make an extra payment or commit to paying off your mortgage in full ahead of its due date, here’s what you need to know to optimize your savings.

Making Extra Payments on Your Home Loan

Despite logical assumptions, making a substantial extra payment on your home mortgage does not lower set future payments. However, while your scheduled payments are not affected by your additional mortgage payment, you will be able to pay down the balance faster, as extra payments reduce the overall loan balance.

Another note: select servicers may actually be able to reduce your home mortgage payments if you make a large extra payment. Just be sure to talk to your lender to set up this arrangement ahead of time, and be prepared to pay a nominal fee.

Getting Ahead of the Curve: Paying Off Your Mortgage in Full

Taking it to the next level, paying your entire mortgage balance early does in fact save a substantial amount of money. While making a regular mortgage payment before its set due date saves you nothing on a month-to-month basis, paying off your mortgage before it reaches maturity can save you thousands of dollars.

By paying your mortgage in full, or even in part, ahead of time, you’re not only saving money that you would otherwise be spending towards interest, but you are also saving by reducing the total principal payment on your loan.

While paying off your mortgage is a potentially lengthy process, understanding these tips for reducing the longevity and amount of interest you owe can help to streamline the process. Learn more about your own home mortgage, and see what you can do to reduce your home mortgage payments by getting in touch with a Lending Solutions Officer at Options Financial today!

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2 Comments

  • Brian
    Posted February 20, 2017 at 6:54 pm | Permalink

     what about making a mortgage payment the day of closing

    • OptionsRM
      Posted February 21, 2017 at 8:27 pm | Permalink

      Thanks for your question, Brian. Lending Solutions Officer, Michelle Joslin took a moment to reply to your question:

      "Yes, making extra payments before can impact how much interest is paid over the life of the loan since every payment is based on the principle balance from the month before; so if you lower the principle balance, the amount of the payment that goes to principle is increased, and the loan is paid off sooner with less going to interest. The better question though is, "is my money best spent paying extra principle payments on my mortgage"? Often people have debts with higher interest rates and where extra payments (and paying those debts off) would result in additional monthly cash flow. Or sometimes investing is the better option."

      Feel free to leave additional feedback here if you have more questions, or you can contact Michelle directly at: http://optionsrm.com/our-story/team-members/michelle-joslin/

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