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AAFMAA Mortgage Services

Should I Pay Extra on My Mortgage Each Month?

2021-05-11

A lot of Members ask AAFMAA Mortgage Services LLC (AMS) what (if any) benefits they would reap by paying a little more toward their mortgage each month to reduce their principal loan balance. The simple answer is that it really depends on your individual situation and how that’s likely to change in the coming years. Will you be staying in your home for long enough to enjoy the benefits of paying more? Will you have a change in income due to retiring or starting a second career? Are you already stretched thin each month or do you have extra funds you can afford to spend on home expenses?

Pros

Let’s say you want to prepay your mortgage by:

  • Making an extra mortgage payment each year
  • Adding extra dollars to every payment
  • Applying a lump sum to your payment, such as with your tax return

The benefit of paying additional principal on your mortgage is twofold. You’ll lower your monthly interest rate expense a bit at a time. Plus, you’ll be paying down your outstanding loan balance, thus building your home equity faster, and reducing the total interest over the life of the loan.

For example, suppose you have an original 30-year fixed-rate mortgage of $165,000 with a 4.5% interest rate, and the principal and interest part of your mortgage payment totals $836.03. If you make extra payments, this is what may happen:

Payment Method You'll Be Paying for... Total Interest Total Interest Saved
Make standard minimum payment every month* 30 years $135,971.07 $0
13 payments a year* 29 years, 9 months $112,291.47 $23,679.57
Adding $100 each month* 22 years, 6 months $105,547.52 $30,423.55
Adding $50 each month* 25 years, 8 months $118,694.95 $17,276.57
Adding $25 each month* 27 years, 8 months $126,696.63 $9,274.44

*Note: The example in the table above assumes a principal and interest payment of $836.03 per month. Please contact us to understand what your potential savings could be. We'll help you determine the impact of extra payments on your mortgage.

Cons

Of course, tying up your cash in your home leaves less “liquid” money in your accounts — money you may need for unforeseen expenses such as home repairs or medical bills. Plus, depending on your situation, there could be better uses for that money, such as paying down high-interest credit cards or loans, contributing to your retirement accounts, or putting it into an emergency fund.

Some Caveats

If you decide to make extra payments on your mortgage, make sure you earmark them with your lender so they’ll go toward your loan principal. Ask your lender for instructions on how to do this and make sure you do it correctly because, if you don’t, those payments could be applied toward your next monthly payment, which won’t help you achieve your goal of prepaying your mortgage.

Also be aware of how much equity you have in your home. Paying down your mortgage principal at a faster rate helps eliminate PMI faster — if you have mortgage insurance on your loan. Once your equity (how much you own versus how much you owe) reaches at least 20%, you can ask the lender to remove the private mortgage insurance, or PMI, that’s part of your monthly mortgage payment if applicable.

Personal Experience

For some homeowners prepayment is truly a benefit. 

This can be especially important for military families that plan on moving before paying off their home, she adds. Building principal or “equity” in a home can help when refinancing. However, you should always consult with a professional for help in assessing your financial goals, income and budget to decide what’s right for you.

We’re Here to Help

If you’re not certain about whether or not it’s the right time to purchase or refinance your home or how extra payments will affect your budget and mortgage goals, please contact us online today or call (877) 387-6856. One of our Military Mortgage Advisors will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of low-rate and low-cost mortgages designed to meet your needs.

Ensuring existing and prospective AAFMAA Members obtain the best mortgage possible is our mission. Get your free AMS mortgage assessment today!