How Many Years Does 2 Extra Mortgage Payments Take Off?

How many U.S. homes are mortgage-free?

According to Census Bureau data analyzed by Axios, 39.3% of homes in the U.S. do not have a mortgage loan. This is the highest percentage of mortgage-free homes since 2005. Over the past decade, the number of mortgage-free homes has increased by 5%, rising from 34.3%.

Bloomberg attributes this rise to baby boomers who took advantage of low-interest rates to refinance their mortgage loans.

Experian also reports that mortgage inquiries have declined as mortgage rates increase. While less buyer activity is one obvious reason, some analysts believe this drop is also being fueled by baby boomers paying off their mortgages and using their equity to buy their next homes. Therefore, eliminating the need for another mortgage loan.

Change in mortgage inquiries, 2022-2023

Strategies to pay off a mortgage early

There are several common strategies to pay off your mortgage early, each with its unique advantages:

Bi-weekly payments, or one extra monthly payment each year

By making bi-weekly payments, you end up making one extra monthly payment each year. This method can reduce the length of your mortgage term and save you money on interest over time.

Add to your monthly payment

Adding extra money to your monthly mortgage payment can directly reduce your principal balance. Even small additional amounts can significantly shorten your loan term and lower your interest costs.

Refinance to a shorter loan term

Refinancing your mortgage to a shorter term, such as 15 years instead of 30, can help you pay off your loan faster. While this option usually comes with higher monthly payments, it reduces the overall interest paid and shortens the mortgage duration.

Lump sum payment

Making a lump sum payment toward your mortgage can significantly reduce your principal balance. This approach is particularly effective if you come into a large sum of money, such as a bonus or inheritance. It can accelerate your mortgage payoff and reduce the total interest paid.

How many years does 2 extra mortgage payments take off?

Making two extra mortgage payments per year can significantly impact your mortgage term and overall interest paid. By spreading these extra payments throughout the year, you can reduce your loan term and save a substantial amount in interest.

To illustrate this, let’s consider a home purchase price of $350,000 with a 20% down payment, resulting in a mortgage loan amount of $280,000 at a 6% interest rate for a 30-year fixed mortgage.

The difference two extra mortgage payments can make

To simplify our example, we’ve taken the equivalent of two extra mortgage payments per year on a $280,000 loan and split it up into an extra $280 per month.

Monthly payment of $1,678.74 x 2 = $3,357.48 (rounded up to $3,360 per year)

$3,360 divided by 12 months = $280.00

	Original payment	With payoff payments	Difference/savings
Monthly pay	$1,678.74	$1,958.74	+$280.00 monthly
Total payments	$604,346.93	$492,626.22	-$111,720.71
Total interest	$324,346.93	$212,626.22	-$111,720.71
Payoff in years	30 years	21 years	-9 years

Source: Calculator.net Mortgage Payoff Calculator

By making an additional $280 per month, equivalent to two extra payments per year, you can reduce your mortgage term by nine years (30%) and save over $111,000 (34.4%) in total interest. This strategy not only shortens the duration of your mortgage but also significantly reduces the overall cost of your loan.

How your month-to-month payoff progress might look

To see how dramatically this strategy can reduce your principal balance and interest costs over time, below is a monthly amortization schedule for this example loan showing year 1 and years 20 and 21, when the loan balance is paid off early compared to a typical 30-year mortgage.

Should you pay off your mortgage early?

Paying off your mortgage early has its advantages and disadvantages. Here are some key pros and cons to consider:

Pros:

• Save on interest: Pay less interest over the life of the loan.
• Increase cash flow: Free up cash for other purchases or investments.
• Peace of mind: Gain peace of mind knowing your home is paid off.
• Financial transformation: Transform your financial outlook and mindset.

Cons:

• Tax benefits: You could lose out on a tax benefit for having a mortgage.
• Higher-interest debt: It may be wiser to channel extra income to higher-interest debt.
• Investment opportunities: You might benefit more by investing extra income.
• Home equity liquidity: It’s tough to withdraw equity from your home if you need it fast.
• Other priorities: You may need the extra funds for more pressing priorities.
• Prepayment penalties: Your loan servicer might charge a prepayment penalty.

Find the mortgage strategy that works for you

Choosing the right mortgage strategy plays a huge role in your overall financial health. Whether you decide to make extra payments to pay off your mortgage early or explore other options, it’s important to understand how it will impact your financial and family goals. It’s often best to consult with a professional advisor before making this decision.

For homeowners considering selling or refinancing, knowing your home’s current value can provide helpful insights. Use HomeLight’s free online home value estimator tool to get a preliminary estimate of your home’s worth.

Header Image Source: (kzlobastov/DepositPhotos)