One Extra Mortgage Payment

You finally own that home you always wanted. You’re benefiting from the financial perks, but with a new home comes a new monthly mortgage payment … and perhaps a new interest rate to consider. 

You may not know this, but at the beginning of your mortgage, a lot of that monthly mortgage payment goes toward interest. That’s because your loan balance is still at or near the original amount you borrowed, since you’ve just started paying it off.

When you’re calculating your annual budget with your new mortgage payment, it can be wise to consider paying extra toward your mortgage in the form of an additional payment. 

There are three reasons why this could be a smart move for you. You might be surprised at how much money one extra mortgage payment can save you.

Reason #1: Saves Money on Interest 

When you pay extra money toward your mortgage payment, you can specify that you want that money going toward your principal. 

This will gradually—but noticeably—reduce your loan balance. 

And what does a reduced loan balance mean? It means you’ll pay less interest over time. It means you can pay off your mortgage early. It means you’re saving money. 

The lower your loan balance, the less interest is added to the mortgage payment each month. These savings won’t affect your monthly payment during the loan. But by the time you pay it off you will have saved thousands of dollars in interest—and reduced the time you’re making those pesky monthly payments. 

Reason #2: Build Equity Faster

As you reduce your principal and interest, your equity increases (assuming home values are maintained). Having equity built up in your home increases the value of your investment, which translates to increased profits if and when you decide to sell. 

Equity also provides an option for future home improvement loans, if needed. 

And if you have less than 20% equity and are paying PMI (private mortgage insurance), those extra payments will help get you to the 20% threshold faster so you can eliminate the PMI payment. 

Reason #3: Pay Off Your Mortgage Early

What can one extra payment a year really do to the term of your loan?

That one additional payment may help you pay off your mortgage as much as three to four years early—and if you make more than one additional payment per year, it’s even faster! 

Not only do you save money on interest, but you’ll be clear of having a mortgage payment at all much more quickly.

Just think about what those dollars could be used for. College tuition, vacations, a second home, or even an investment property. That one extra payment allows you to build long-term wealth. 

In the end, it doesn’t matter what you do with the extra money—the point is that it’s your decision to make. Even if your goal is simply to become debt-free, those extra mortgage payments will get you there faster.

How to Make an Extra Mortgage Payment

There are multiple ways you can make extra mortgage payments. Here are three strategies that might work for you:

1. A Lump Sum Payment

Save any extra money throughout the year until it equals one extra mortgage payment. Then send it in at any point during the year, but be sure to specify that this is a principal-only payment. 

If you’re not sure how to do this, contact your loan servicer for instructions.

2. Extra Dollars in Each Monthly Payment 

Divide your monthly mortgage payment by 12, and then add that amount to each monthly payment. 

For example, if your monthly mortgage payment is $1,200, that would be 1,200 divided by 12 months, which equals $100. That’s the extra money you would add to each monthly payment to chip away at your mortgage balance.

In this scenario, you would then increase the amount you send in for your mortgage payment to $1,300 a month ($1,200 + $100). Be sure to confirm that the extra funds will be applied to your principal loan balance.

3. Biweekly Payments 

Just like you might be unaware of what a dent an extra mortgage payment can make in the life of the loan, you may not realize what a biweekly payment can do.

By simply dividing your monthly payment in half and paying that amount every other week, you’ll create an additional payment every year. That’s because the length of each month varies, but the number of weeks in a year does not. 

Relying on a biweekly schedule allows you to capitalize on this discrepancy, resulting in an extra payment. After all, 26 half-payments per year is equal to 13 whole payments … giving you an extra payment and hardly noticing it!

Before You Dive In

Now, a few disclaimers. Before you decide to start making extra mortgage payments each year, you want to make sure you’re financially healthy. 

If you have high-interest debt or a 401(k) that needs to be funded, any extra money may be better spent on these items. 

You should also keep an emergency fund that can cover at least three months—but ideally six months—of living expenses. This will protect you in case something happens to your employment or income. 

Lastly, you want to check with your loan officer to ensure that your mortgage doesn’t carry prepayment penalties. Most of these penalties apply to much larger paydowns, but you’ll want to be sure before you start sending in money. 

One thing to note is that these penalties expire after a specified amount of time (usually no longer than five years), so if you have such a penalty, just sock the extra money away and make one larger payment after the penalty period expires. 

Though one additional mortgage payment per year may seem like a drop in the bucket, especially early in the life of the loan, this extra money will soon add up. 

Before you know it, your diligence will help you reach your goals sooner.

Ready to put that extra money toward your mortgage payment and understand the savings you could unlock? Our APM Loan Advisors are here to help. Give us a call today!

Dos and Don’ts of the Mortgage Process

The mortgage process can be stressful … we know. Bank statements, credit scores, interest rates, loan estimates, closing disclosures, and more can really bog you down during the homebuying journey. That’s why we’re offering you a quick list of do’s and don’ts to help you cut through the noise and create a speedy mortgage process so you can focus on the fun stuff: finding your dream home!

Do: Get Pre-Approved Early

Don’t: Go House-Shopping Without Knowing What You Can Afford

When you get pre-approved for a mortgage loan early in the homebuying process, you identify exactly how much house you can afford. Plus, you can make a stronger, more competitive offer with a pre-approval letter—since a lender has already verified your income and assets to ensure that you can make the monthly payment. We buy houses in Jacksonville

Do: Work with Homebuying Professionals

Don’t: Think You Have to Go It Alone

Consider your homebuying professionals—such as loan officers, real estate agents, and home inspectors—as your coaches. Each has a unique skill set and experience that will help you reach your goal. You might even want to engage the help of a CPA, especially if you’re self-employed. 

Do: Understand Your Credit

Don’t: Open or Close Credit Lines Without Consulting a Professional

It’s a good idea to understand your overall credit picture when you’re applying for a mortgage. Request a free copy of your credit report from each of the three major credit reporting bureaus. If you see something inaccurate, contact the credit agency to resolve the issue. Avoid opening new lines of credit, closing credit lines, co-signing on loans, or making major purchases with credit cards before or during the mortgage loan process. Whatever your finances, be sure to include all debts and liabilities on your mortgage application. Honesty is always the best policy! Sell your home in Miami

Do: Keep the Lines of Communication Open

Don’t: Be Slow to Respond to Your Loan Team 

You’ll hear from your loan officer throughout the mortgage process. You can keep things moving by providing any documents or information your loan officer requests ASAP. The key to getting a mortgage approved on time often comes down to the level of responsiveness from the borrower.

Do: Make a Savings Plan

Don’t: Make Major Purchases

Now is the time to focus on saving—not spending—your money. You may need funds available for things like an earnest money deposit, a down payment, or closing costs. Don’t make any large purchases—such as a new car, boat, or furniture—during this time, as these could impact your credit. Late payments can also be a red flag on a mortgage application, so make it a habit to pay your bills on time.

Do: Maintain Your Current Employment and Income

Don’t: Quit or Change Jobs 

Applying for a mortgage is all about showing stability. The process goes more smoothly if you keep your job and income steady, while avoiding major changes like quitting your job. Don’t worry about getting a pay raise or a promotion, though—those are the exceptions to this rule! Amending your tax returns during the mortgage process can also trip up your application. If you do make a change, you may need a new loan approval.

Do: Maintain a Paper Trail

Don’t: Make Large Bank Deposits (Other Than Your Paycheck)

Mortgage lenders are required to document where your funds come from for earnest money deposits and down payments, even if you are using gift funds. Have a clear paper trail showing how money is coming in and out of your bank accounts, and where it’s coming from. Avoid making large cash deposits (or electronic transfers) into your personal banking account that can’t be accounted for. It’s also a good idea to keep personal and business funds in two different accounts if you’re self-employed.

Do: Keep Good Records

Don’t: Be Surprised if You’re Asked for More Documents 

Mortgage lenders like to see documentation related to income, employment verification, and your current debts or obligations. This is where good records—such as W2s, tax return documents, pay stubs, and bank statements—come in handy.

Do: Ask Questions

Don’t: Panic! (Really, It’s Going To Be Fine)

Your loan officer wants you to feel knowledgeable and confident about the mortgage process. Ask as many questions as you’d like—and don’t panic! The mortgage process may seem confusing, but your loan officer is here to help you get to the finish line. Trust their expertise, keep the lines of communication open, and learn what you can about the loan process. You may find that it’s less difficult than you imagined.

How to Prepare for the Mortgage Process

Want to be fully prepared to meet with an APM Loan Advisor near you? Here’s a partial list of what you can gather in advance:

  • Two months of most current asset statements for all accounts, including blank pages
  • Two years of W2s
  • Two years of federal tax returns with all schedules
  • Recent pay stubs
  • Most recent statements for retirement accounts (IRA, 401(k), etc.)
  • Copy of driver’s license or other proof of identity
  • YTD profit and loss (P&L) statement for self-employed borrowers
  • Mortgage statement for all properties owned
  • Homeowner’s insurance for all properties owned

It’s important to remember that the list of items requested by the lender will vary from person to person—and even transaction to transaction. 

Your APM Loan Advisor will give you a detailed list of items needed right from the start so you can get them gathered. And if you work with APM, you can even manage your to-do list and scan and securely send your documents right from your phone!