Many of us like the idea of owning a home. Unfortunately, it is practically impossible for most of us to buy a home without getting a mortgage – and that means a huge loan. A lot has been said about the benefits of paying off a mortgage early in order to stop paying interest and to have a home with 100% equity. If you have already paid of your credit card debt, and your other higher interest obligations, it might be worth it to consider paying off your mortgage with extra income.

Supplemental Income and Your Mortgage

Having supplemental income can allow you to save money on your mortgage in more than one way:

Make a lump sum payment: In some cases, your supplemental income might actually allow you to make a lump sum payment. If you experience a windfall in the form of royalties, and inheritance or a life insurance pay out, you might be able to use it to pay off your mortgage. Double check for prepayment penalties, avoiding them when possible, and making sure that it is still worth it to pay off the mortgage if you have a hefty prepayment penalty.

Make extra payments: If making a lump sum payment isn’t practical, you can use your extra income to make extra payments. You can use a mortgage payoff calculator to determine how much you could save with an extra payment. If you had a 30-year mortgage of $190,000, at 6%, and 25 years remaining, you could save $59,980 over the life of your loan by adding $250 to your payment each month. Create an income stream that would double your mortgage payment (from $1,139 to $2,278), and you could save $117,425. Not bad at all.

Refinance: Another option is to refinance your home to a lower interest rate – and a shorter term. Bankrate has a mortgage refinance calculator that can help you figure out the costs. Our calculation will use the same numbers as above, but eliminate the costs of refinancing (such as fees and points), in order to provide an idea of possible savings if you refinance to a 5% interest rate.

Refinance to a 20-year loan, and you would need to pay an extra $27.82 a month, and you would save $61,662.39. Go with a 15-year loan, though, and you would have to come up with an extra $259.15 per month – but save $90,033.17 over the life of the loan.

Bottom Line

Some argue that paying down your mortgage is unnecessary, since using your supplement income for the right investments could result in returns that would more than offset your mortgage interest rate. Others, though, are more interested in paying off all debt as quickly as possible, and not having that drain on their wealth. If you decide that you want to pay off your mortgage using supplemental income, you will save more in the long run – and be done with your home loan debt faster – if you can put more toward your mortgage payment.