An annual bonus can be a wonderful windfall to use as you wish at the end of the year. It could possibly go into a savings account, a special acquisition, reducing the balance on your credit cards or even used to put a bit extra towards your mortgage payments. Using an annual bonus as a lump sum payment towards your mortgage will drastically reduce your mortgage pay off period.
The month-to-month repayment your mortgage loan provider calls for is the minimum amount you must pay in order to keep your mortgage in good standing. It doesn’t suggest that you can’t pay even more! It is certainly worth using part of your bonus to make an additional payment against the outstanding principal on your home mortgage.
If for instance you have a $200,000 mortgage taken out over a 30 year period at a 6.5 percent interest rate, just a single payment each year of $1,000 will shave off nearly five years of payments from the length of your loan and reduce the total amount of interest you pay by over $45,000. An exception to this rule is an adjustable-rate mortgage, where payments may increase or decrease if the interest rate of the loan changes.
An additional option you should consider is whether or not investing the cash in a high interest savings or other investment account might be more valuable. It could be more to your benefit to amass a larger amount and pay a bigger lump sum, perhaps every 5 years. You can use a mortgage calculator to figure out how much you can generate over a five year period at the current interest rate.
You should examine your entire financial situation before you make any additional mortgage payments. Paying down outstanding high-interest credit-card balances, for instance, should be a major priority. You should also find out if your mortgage has a mortgage pre-payment penalty clause, and calculate whether it is worth it or not to pay any extra at all.
