Hear about those people who, by adding $50 per month to their mortgage payment cut their loan in half? You can actually do that. Look on the web for a mortgage accelerator calculator. They will show you how fast you can pay off your home by paying a little extra each month.
An unbudgeted annual bonus can be a wonderful windfall at the end of the year to do with as you please. It could go into savings, a special purchase, paying down your credit cards or into your house as a prepayment on your loan. When your mortgage is calculated, either fixed or adjusted, you are told how much to pay on a monthly basis. However, a mortgage calculator that specializes in additional payments will show it can be very much in your favor to consider this using your bonus as an additional annual payment.
And you thought you were through with a mortgage calculator after you signed the papers on your house.
The monthly payment your mortgage lender requires is the least amount you must pay in order to keep current on your mortgage. It doesn't mean that you can't pay more! If you have an annual bonus which comes in every year, then it is definitely worth investing this by paying an additional annual payment against the principal outstanding on your mortgage.
Use a mortgage calculator to work out how much difference your annual bonus makes to your mortgage. Depending on the size of the annual bonus, and how much of it you want to use against your mortgage principal, you can save money in terms of interest you won't need to pay. This reduction shows up because you are paying the loan off faster that your mortgage. The less time you owe, the less interest you pay.
This is the "miracle of compound interest" your bank loves working against him. When you pay ahead on the principal, you reduce the amount of interest you pay on the interest. Poor him, lucky you. Your mortgage calculator reveals the way to make it work for, not against you.
Another option you need to consider, however, is whether or not investing the money in another way would be more beneficial. It might work to your advantage to build up a larger amount and pay in that lump sum, say every 5 years, for example.
Using the current rate of interest offered for an investment account that can be opened with the amount of your annual bonus, work out how much in total you would have at the end of 5 years. Then pull up the additional payment mortgage calculator to work out what difference it would make to your loan.
The investment account pays you interest, and so you will have extra money to pay against your principal. In the second part of this scenario: use the mortgage calculator to calculate the mortgage if you paid the bonus directly against the principal balance on your mortgage each year for 5 years.
Which of the two totals works best for you financially? If it looks too good to be true, change mortgage calculators and double check. Which of them gives you a lower balance and lower mortgage term? This is the option that most effectively puts your money to work.
An additional payment against your mortgage principal is an ideal way of investing your extra capital in your home. Use the mortgage calculator first however to determine whether this, or an investment account, is the most efficient use of your money.