A mortgage is a loan that helps you finance the purchase of a home. You can either get a fixed-rate mortgage or an adjustable-rate mortgage (ARM). With a fixed-rate mortgage, your interest rate stays the same for the life of the loan.
With an ARM, your interest rate changes periodically, and it’s usually lower at first than it is later on. Making a lump-sum payment on your mortgage means making an extra payment on top of your regular monthly payments.
For example, if you have a $1,000 monthly mortgage payment and you make a lump-sum payment of $5,000, you’ll have paid off six months’ worth of mortgage payments.
Lump-sum payments can be a great way to pay off your mortgage faster and save money on interest. But there are some things you should know before you make one. Read on to learn more about the pros and cons of making lump-sum payments on your mortgage.
What Happens When You Make a Lump-Sum Payment
When you make a lump-sum payment on your mortgage, the additional amount is applied to your principal balance. This reduces the amount of interest you pay over the life of the loan and may help you pay off your mortgage faster.
You may also be able to negotiate a lower interest rate with your lender if you make a lump-sum payment.
When you make a lump-sum payment on your mortgage, the amount of the payment is applied to your outstanding principal balance. This reduces the amount of interest you will pay over the life of the loan.
In addition, if you have a fixed-rate mortgage, you may be able to shorten the term of your loan by making a lump-sum payment.
Recasting Your Mortgage
If you’ve been thinking about making a lump-sum payment on your mortgage, you’re not alone. In fact, many homeowners are interested in doing this in order to save money on interest and pay off their mortgage sooner.
There are a few things to consider before making a lump-sum payment on your mortgage, such as:
How much extra can you afford to pay?
What will the new interest rate be?
What are the penalties for prepaying?
Once you’ve considered all of these factors, you can decide if making a lump-sum payment on your mortgage is the right decision for you. If it is, there are a few different ways to do it.
One option is to simply make an additional regular payment each month. This will reduce the principal balance of your loan and save you money on interest over time.
Another option is to refinance your mortgage and take out a new loan with a lower interest rate. This could save you even more money over time, but it’s important to compare rates and fees carefully before refinancing.
Pros and cons of making a lump-sum payment
There are a few key things to consider before making a lump-sum payment on your mortgage. On the plus side, you could potentially save a lot of money on interest by doing so. Paying down your principal balance more quickly can also help you build equity in your home faster.
On the downside, making a lump-sum payment may not be the best use of your money if you have other high-interest debt that you could pay off first.
Additionally, you may be charged a prepayment penalty by your lender if you make a lump-sum payment within a certain number of years from taking out your mortgage.
Before making any decisions, it’s important to speak with your lender and financial advisor to see what makes the most sense for your unique situation.
When a Lump-Sum Payment Makes Sense
If you find yourself with a large chunk of money—perhaps from an inheritance, tax refund, or work bonus—you may be wondering if making a lump-sum payment on your mortgage is a wise financial move.
On the one hand, paying off your mortgage sooner can save you thousands of dollars in interest payments. Plus, it’s a huge weight off your shoulders to know that your home is paid for.
On the other hand, you may need that money for other purposes, such as investing or saving for retirement. And keep in mind that if you have a fixed-rate mortgage, you may be charged a prepayment penalty for paying off your loan early.
So how do you decide whether making a lump-sum payment makes sense for you?
Here are three questions to ask yourself:
To calculate this, you’ll need to know your mortgage balance and interest rate. Let’s say you have a $200,000 mortgage with a 4% interest rate. If you make a lump-sum payment of $20,000 today, you’ll reduce your principal balance to $180,000.
With the same interest rate and term length (30 years), you’ll now pay $163 per month in interest—a savings of $27 per month compared to your current monthly payment of $190.
When Recasting Makes Sense
If you have extra cash and want to save on interest, making a lump-sum payment on your mortgage can be a great idea. But there are also times when it might not make sense to do so.
For example, if you have a fixed-rate mortgage, there’s no benefit to making a lump-sum payment because you’re already getting the lowest possible interest rate. And if you have a low balance, you may not save much money in interest by making a lump-sum payment.
That said, there are still some situations where making a lump-sum payment makes sense. If you have an adjustable-rate mortgage, for instance, you may want to make a lump-sum payment to lock in a lower interest rate before it adjusts upward.
Or if you’re close to paying off your mortgage, making a lump-sum payment could help you eliminate debt faster.
Ultimately, whether or not making a lump-sum payment is right for you depends on your individual circumstances. If you’re not sure what to do, talk to your lender or financial advisor for guidance.
Other Ways To Use Your Extra Cash
When you make a lump-sum payment on your mortgage, you are essentially making an additional payment on top of your regular monthly payments.
This can be a great way to pay off your mortgage faster, as the extra money will go toward the principal balance of your loan. Additionally, making lump-sum payments can help you save on interest over the life of your loan.
If you have extra cash that you want to put towards your mortgage, talk to your lender about making a lump-sum payment. They may require that you notify them in advance, and there may be some restrictions on how you can use the funds.
But overall, making a lump-sum payment on your mortgage can be a great way to speed up the payoff process and save money in the long run.