After You Buy a House: Does Making additional Mortgage Payments Pay Off?

You’ve closed the deal to buy a house. And you’ve probably written one of the biggest checks you will ever write in your life at closing. But it might be a good time to think about the way you will make your future mortgage payments. Developing a strategy before you buy a house can save you a important amount of money in the long term.

Making additional payments closest after you buy a house shortens the length of your mortgage, and reduces your total interest. This is how it works: With every mortgage payment you make, part pays off interest and the balance pays off the principal. The amount of each portion is calculated by a course of action of amortization, which changes the equation each month as you make payments. The principal portion of each payment is deducted from the amount of noticeable principal, and the loan is recalculated from the time you buy a house until you pay off the mortgage.

If you choose a mortgage with a variable rate when you buy a house, your monthly payment amount may get larger or smaller as the loan’s interest rate changes, based on the market. But if you have a fixed-rate mortgage, your monthly payment always stays the same throughout the life of the loan. But as you make payments, the principal portion gets larger and the interest portion gets smaller. This method that you can save important money on the total interest you pay over the life of the loan my making additional payments, especially right after you buy a house. It will also help you shave years off your mortgage. As an example, doubling your monthly payment every month from the time you buy a house will cut the length of your mortgage in half.

The best time to make additional payments is right after you buy a house. That’s because a larger portion of your payment goes toward interest than principal. You can also make an additional payment anytime you receive unexpected money, a tax refund, bonus or commission payment.

Another strategy is to make bi-weekly payments. Making a payment every two weeks gives you 13 monthly payments over a year instead of 12. Your first payment each month must be your complete scheduled payment, in spite of of any additional payments you have made. The second one can be any amount you choose.

Making additional payments are very smart over the long run. But you also need to consider short-term cash flow, especially if making an additional payment one month causes you to be short for your next month’s payment.

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