How Much Your First Mortgage Payment Will Be
To find out how much your first mortgage payment will be, check your closing disclosure form. You’ll get this form at least three days before closing, and it will say how much your monthly mortgage payment will be.
If you have a fixed-rate mortgage, your first mortgage payment will be the same as each subsequent payment throughout the life of the mortgage. The only caveat is that your payment may be adjusted to accommodate higher property taxes or homeowners insurance, both of which are paid from your escrow account.
If you have a variable-rate loan, your first mortgage payment will be the amount listed on the closing disclosure form.
Get A Loan Modification
If your mortgage payments are unaffordable but you want to get back on track and potentially pay the loan off early, consider a home loan modification. Generally reserved for borrowers experiencing financial hardship, a loan modification entails the lender adjusting the interest rate or loan term to help bring the loan current.
With this option, you could save on interest and pay the loan off faster. There could be consequences for your credit, however, depending on how your lender or servicer reports it to the credit agencies, so be sure to discuss this with your lender upfront.
Should You Make Extra Mortgage Principal Payments
After settling into a home or finding a little more financial flexibility, many homeowners begin asking, should I make extra mortgage payments? After all, making extra payments can save on interest costs and shorten the length of your mortgage bringing you that much closer to owning your home outright.
Yet, while the thought of paying down your mortgage faster and living in your home without a mortgage sounds great, there can be reasons why making extra payments toward the principal might not make sense.
Sometimes its good to make extra mortgage payments, but not always, says Kristi Sullivan of Sullivan Financial Planning in Denver, Colorado. For example, paying an extra $200/month on your mortgage to knock it down from 30 years to 25 years in a house you only imagine living in for another five years does not help you. You will tie up that extra monthly payment and never realize the benefit of it.”
While many agree the thrill of living without a mortgage is liberating, you can accomplish that in more ways than one. So how do you know if it makes sense for you to begin paying a little extra principal each month on your mortgage? It depends on your financial situation and how you manage your discretionary funds.
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Should I Pay Off My Mortgage Early Or Save My Money Instead
When you closed on your home mortgage, you may have felt an unmistakable thrill as those house keys finally landed in your hand.
However, you may also have felt a bit anxious about the âpaying off the mortgageâ part of your new housing adventure. If you have a mortgage, youâre not alone: Right now, most Americans who own a home still have a mortgage . Only about 1 in 3 U.S. homeowners never had a mortgage or have paid it off. 1
A mortgage may be the biggest debt you ever take on. After all, you could be making monthly mortgage payments for up to 30 years. And over that time, you might end up wishing you had extra money for anything from fixing your carâs transmission to a great business opportunity .
Answering the big question
So if you have some extra money, whatâs the best thing to do with it? Should you try to pay off your mortgage early and get rid of that debt? Or are you better off continuing to pay your mortgage and putting any extra cash in savings?
The decision isnât a slam-dunk. The best option really depends on your financial situation and your money goals. Itâs one of the most hotly contested debates of the financial world: Should you pay off your mortgage early or save your extra cash?
If youâre asking this question, thatâs a sign that youâre in a great financial position. It means you have some money left over each month after paying bills, and thatâs no easy feat.
Are you taking care of other financial priorities?
When Paying Off Your Mortgage Early Works
You might assume that you need to shell out hundreds of extra dollars each month to pay off your mortgage early. The truth is, even a very small monthly or one annual payment can make a major difference over the course of your loan.
Contributing just $50 extra a month can help you pay off your mortgage years ahead of schedule. You dont need to find a way to earn an extra $10,000 a year to pay off your mortgage.
Play around with our Rocket Mortgage® mortgage amortization calculator to see for yourself how a small amount of money can impact your loan. It might surprise you. Most people can manage to save at least a few thousand dollars in interest with a small monthly extra payment. This is especially true if you start paying more on your loan in the early years of your mortgage.
The best candidates for early mortgage payoffs are those who already have enough money to cover an emergency. Youll want at least 3 6 months worth of household expenses in liquid cash before you focus on paying off your mortgage. This is because its much more difficult to take money out of your home than it is to withdraw money from a savings account.
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The Extra Money Might Be Better Used For Investments That Could Make You Money
There are very few people in the world that have more money than they know what to do with, that being said what you choose to do with the amount of money you have is important. Putting some extra money into your mortgage payments above the minimum required amount can be a good decision, but it could also mean that you are missing out on other investment opportunities that could be making you a bigger profit. Some other beneficial investments you could use this money for could include investing in a retirement plan, building up an emergency fund, investing in the stock market, or investing in other areas that could bring a higher and quicker rate of investment return on your money.
Make Slightly Increased Payments
Paying off your mortgage early doesnt have to be financially painful. One of the most popular ways to pay off your mortgage early is to add just a little extra to your monthly mortgage. Adding a mere $50 to $75 to each monthly payment can save you tens of thousands of dollars and shave several years off of your payment schedule. Use this extra payment mortgage calculator to estimate how your increased payments will impact your mortgage. Be sure to contact your lender to ensure that your increased amount will go toward the principal each month.
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Consider A Mortgage Recast
Instead of using extra or biweekly payments to chip away at your loan, you can make a lump sum payment to help you pay off your mortgage faster. This method is known as a mortgage recast.
Once you pay the lump sum toward your principal, your lender recalculates your mortgage to reflect the payment. Although your term and interest rate remain the same, your monthly payments and the amount of interest you have to pay on the remaining balance of your loan is reduced.
Pros Of Paying Off Your Mortgage Early
Overpaying your mortgage can take years off your mortgage, allowing you to be mortgage free as soon as possible.
When you overpay, you no longer pay interest on the amount that you overpay which can reduce your monthly payments.
At times when interest rates are low, the returns on overpaying your mortgage are often higher than putting the money in a savings account.
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Are You Putting Money Into A Pension Scheme
On a £150,000 mortgage at 5% with 25 years remaining, paying off a £5,000 lump sum will reduce the interest by £11,500 and the repayment term by 18 months.
Pensions are a tax-efficient way to save because the government tops up your contributions with tax relief.
And, if you have a workplace pension your employer should pay into the scheme too.
Find out more about workplace pensions in our guide Automatic enrolment an introduction
If you dont have a pension and have money to spare, its important to think about paying into one.
The earlier you start, the sooner your retirement pot will start to grow. With employer contributions and tax relief from the government, you might get more for your money in a pension than youd save in mortgage interest.
Find out more in our guides:
You Might Not Want To Pay Off Your Mortgage Early If
- You need to catch up on retirement savings: If you completed a retirement plan and find you arent contributing enough to your 401, IRA, or other retirement accounts, increasing those contributions should probably be your top priority. Savings in these accounts grow tax-deferred until you withdraw them.
- Your cash reserves are low: You dont want to end up house rich and cash poor by paying off your home loan at the expense of your reserves, says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research. He recommends keeping a cash reserve of three to six months worth of living expenses in case of emergency.
- You carry higher-interest debt: Before you pay off your mortgage, first close out any higher-interest loansespecially nondeductible debt like that from credit cards. Create a habit of paying off credit card debt monthly rather than allowing the balance to build so that youll have fewer expenses when you retire.
- You might miss out on investment returns: If your mortgage rate is lower than what youd earn on a low-risk investment with a similar term, you might consider keeping the mortgage and investing what extra you can.
- You need to diversify: Your house is just as much of an investment as whats in your portfolio. And overconcentration carries its own riskseven when its in something as historically stable as a home. Maintaining your mortgage allows you to fund other asset classes with possibly more growth potential.
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What Is An Amortization Schedule And How Does It Work
7 Minute Read | December 10, 2021
Amortizationwhat a crazy word! This hard-to-say financial term pops up whenever you borrow money to buy big-ticket items like a house.
When your lender mentions an amortization schedule, your eyes might glaze over. We get it. Amortization isnt exactly the most exciting subject. But its an important one!
Well help you define what it means and walk you through a typical amortization schedule using our mortgage calculator so youll know how to pay off your house as fast as possible!
Lets get started.
Reasons Not To Pay Off Your Mortgage Early
If youre thinking of using cash reserves or savings to pay off your loan, you should understand that this may increase your risks and may not be the most prudent use of your cash. While paying off your mortgage loan early is usually a good idea, there are situations where it may not be best use of your free cash flow. Though you would still have your home equity to tap into, selling your home and accessing those funds may prove difficult. Your ability to do so will depend on other factors, including the local market, interest rates and supply and demand. These factors are hard to predict and could change by the time you need to sell. Therefore, its important to maintain a minimum level of cash to meet emergency expenses.
There are also market concerns to consider. Inflation actually devalues any cash you hold uninvested. Assuming inflation continues to rise, the purchasing power of every dollar you hold in cash erodes over time. However, by making all your payments at once, rather than hoarding it in cash savings, your moneyand the house you put it toward owningcould be better protected from inflation and changing market conditions. While this may vary based on your unique real estate market, home values generally appreciate at a rate faster than inflation.
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How To Pay Off Your Mortgage Faster
You can do this by making overpayments, but you can clear your mortgage even quicker if you switch to a cheaper deal.
Remortgaging to a lower interest rate means your monthly payments could go down. But if you keep overpaying, you could pay your mortgage off sooner and with less interest.
Take A Step Back And Think Big Picture
Paying off your mortgage can obviously be a load off your shoulders, so if peace of mind and savings in the bank is your goal, then by all means, send in that check. But if long-term wealth building is more your thing, you’ll want to step back and do some careful evaluations before moving forward. Would paying it off or investing make you more? Are you willing to chance the money in the hopes of doubling or tripling your returns? As with most things in investing, the answer lies in your personal goals as well as your appetite for risk.
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Put Any Windfall Toward Your Mortgage
If youre serious about getting out from under the major monthly expense of a mortgage payment, consider putting unexpected cash toward the principal.
Tax refunds, work bonuses, and inheritance payments give you a chance to pay off a chunk of your mortgage without significantly impacting your monthly budget.
Other windfalls can include profits from selling a car, gaining access to trust money, cashing out an investment, or winning the lottery.
Since VA and FHA loans cant be recast, making a big payment toward the principal yourself is a nice alternative. Plus, you wont pay any closing fees.
Youll need to decide if stashing your newfound cash in an illiquid asset is the right move for your finances. But its a good option if youre laser-focused on paying your mortgage off early.
Just make sure to coordinate with your loan servicer so the money goes toward reducing your principal, not paying off interest.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
Get A Loan With No Credit Score
If youve crushed debt like an old soda can and no longer have a credit score, you have the option of a No Score Loan where you can:
- Refinance your mortgage with a credit score of zeromeaning youve paid off all your debt!
- Walk through a manual underwriting process with your loan specialist.
- Drop to a 15-year fixed-rate mortgageor lower!to pay off your home faster.
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Pay Off Credit Card Debt
If youre having a hard time with like many Americans, its more than likely you dont have enough available cash to commit to paying extra on your mortgage. Your credit card rates are going to be significantly higher than your home loan interest rate so it makes sense to tackle credit card debt first. Credit cards typically carry the highest cost to borrow with an average variable interest rate of about 16%.
Whats An Example Of Amortization
Lets say you work with a top agent to buy a $300,000 house with a 20% down payment . To cover the rest, you take out a 15-year fixed-rate mortgage at a 3.5% interest ratethats a total home loan of $240,000.
Using our mortgage calculator, your monthly mortgage payment would be $1,716 . Later, well show you how to calculate this monthly payment manuallyif youre interested .
To calculate the amortization on this example, lets plug these numbers into the formula we mentioned above:
- $240,000 x 3.5% = $8,400
- $8,400 / 12 = $700
- $1,716 – $700 = $1,016
So, for your first month of making payments, that $1,716 monthly payment will be split into $700 for interest and $1,016 for principalwhich will drop your $240,000 loan balance to just under $239,000.
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The Possibility Of Losing Mortgage Interest Tax Deduction
If you itemize things on your tax return you likely deduct the interest youre paying on your mortgage which is a significant write-off. This means your interest payments dont reduce your taxable income by as much and the government subsidizes some of them. If you pay off your mortgage ahead of schedule then youll lose this deduction on your income tax bill and it could go up.
Reduce The Amount Of Debt You Have
Mortgage debt is a significant undertaking, especially if you have additional debt from student loans, credit cards, etc. By paying off your mortgage early, youll reduce a substantial portion of your debt and free up more funds to make your other monthly payments. The faster you pay off all your debts, the sooner youll achieve financial freedom.
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