What Happens If I Pay an Extra $1,000 a Month on My Mortgage?

Paying off your mortgage early can seem like an impossible feat. But what if you could shave years off your loan term and save thousands in interest just by paying a little extra each month? Let’s explore what happens when you pay an extra $1,000 toward your mortgage principal every month.

How Making Extra Payments Impacts Your Loan

When you make your regular monthly mortgage payment a portion goes toward interest and a portion goes toward paying down the principal (the amount you originally borrowed). By paying an extra $1000 each month, all of that money goes straight to reducing your outstanding principal balance.

This has a snowball effect, reducing the amount of interest that accrues each month. And since interest is calculated based on the current principal balance paying extra now saves you money over the long run by cutting down the total interest paid over the loan’s lifetime.

Crunching the Numbers

To see the true impact, let’s run through an example:

• You have a $300,000 30-year fixed-rate mortgage at 4% interest
• Your monthly principal and interest payment is $1,432
• By paying an extra $1,000 each month, your new monthly payment is $2,432
• Instead of paying the loan off in 30 years, the extra $1,000 a month will pay it off in approximately 15 years
• You will save $96,559 in interest and pay off the loan 114 months (or 9.5 years) faster

As you can see, adding that extra $1,000 a month makes a huge difference! You shave nearly a decade off your loan term and pocket close to $100k in interest savings.

Other Ways to Pay Extra

While adding $1,000 to your monthly payment is effective, you may prefer other methods:

• Bi-weekly payments – Splitting your monthly payment in half and paying every two weeks adds about one extra payment per year, accelerating payoff.
• Lump sum payments – Use your tax refund, work bonus or other windfall to make one-time extra payments toward principal.
• Recasting the mortgage – Recasting adjusts your principal balance to account for extra payments without refinancing. This lowers your monthly payment while maintaining your loan’s original term.

Weighing the Pros and Cons

Before deciding if paying extra is right for you, consider these key pros and cons:

Pros

• Pay off your loan years faster
• Save thousands in interest
• Build equity and own your home sooner
• Eliminate mortgage payment to free up cash flow
• Increase savings for retirement or other goals

Cons

• Less liquidity if cash is tied up in your home
• Potential prepayment penalties (check your loan documents)
• Need budget discipline to consistently pay extra each month
• Lower credit score temporarily when account is paid off

Is Paying Extra Right for You?

As with any major money decision, your personal financial situation should steer your course.

Paying extra can be a smart move if:

• You won’t need the extra cash for other goals in the near term
• You have a stable income that allows for larger monthly payments
• Your career is on track and you don’t foresee relocating soon
• You understand any prepayment penalties per your loan documents
• You have an emergency fund and other key financial bases covered

But it may not be the best choice if:

• You have other high-interest debt like credit cards to pay off first
• You need to build up emergency savings or cover essential expenses
• Your income is volatile or unstable
• You plan to move within the next 5-7 years

Ultimately, run the numbers, weigh the tradeoffs and talk to a financial advisor to decide if paying extra on your mortgage helps propel you closer to your financial goals. The savings can be massive, but make sure it fits into your overall financial plan.

Explore Your Options

If paying off your mortgage early appeals to you, use our extra payment calculator to run the numbers with your actual loan details.

You can also speak to one of our home lending advisors to go over your full financial picture. We can calculate exactly how much you’ll save based on your current mortgage, and discuss the best way to structure extra payments.

Whether it’s an extra $1,000 a month or well-timed lump sum payments, we’re here to help create a payoff plan tailored to your unique needs and long-term financial goals. Paying off your home faster could allow you to begin the next chapter of your life mortgage-free.