The main benefit of making an extra mortgage payment is that it can allow a loan to be paid off more quickly. If an extra mortgage payment is made on a regular basis, several years may be removed from the overall term of a loan. In the short term, this leads to more equity which can provide additional benefits such as better loan terms if a refinance is required. Making a single extra mortgage payment typically does not have any advantages, though over many years it can add up. In some cases the advantages do not outweigh potential consequences, particularly if the loan interest rate is very low compared to potential investments.
When an extra mortgage payment is made on a yearly basis or a smaller amount is added each month, the money saved is compounded. The extra money that is paid is not simply subtracted from the total owed because the interest that would otherwise have been paid on that amount over many years is also removed. In this way, one extra mortgage payment each year can remove several years from the total term of the loan and potentially save a great deal of money.
There are also potential short term benefits that can be associated with making a regular extra mortgage payment. Since the principal balance is reduced faster, there will tend to be a greater deal of equity in the home. This can make it more attractive for a lender if circumstances require a refinance. It can also make it easier for the homeowner to get credit elsewhere because his equity may result in him being considered less of a risk. This can result in that extra mortgage payment providing something of a short term safety net in case circumstances change.
In some cases, it is not a good idea to make extra payments on a mortgage. If the interest rate on the loan is very low, it may make more financial sense to invest elsewhere. This is because the money that would go into an extra payment could make more money in an investment than it would save by shortening the length of the mortgage. If the house will definitely be sold or refinanced before the end of the mortgage, that may also result in it being unwise to make extra payments. This is because the true benefit of making extra payments is only realized over many years.
