Paying Extra Towards Mortgage Principal Pays Off
Prepaying your mortgage: How reducing your loan principal can lead to big savings.
When you prepay your mortgage, it means that you make extra payments on your principal loan balance. Paying additional principal on your mortgage can save you thousands of dollars in interest. In addition, help you build equity faster.
There are several ways to prepay a mortgage:
- Apply a lump sum after an inheritance or other windfall.
- Make an extra mortgage payment every year.
- Add extra dollars to every payment.
- Some combination of the above.
For instance, here’s an example of how prepaying saves money and time: Tiffany takes out a $120,000 mortgage at a 4.5 percent interest rate. The monthly mortgage principal and interest total $608.02. Here’s what happens when Tiffany makes extra mortgage payments:
*Extra $608.02 payment
When asking yourself, “Can I prepay my mortgage?” look at your entire financial picture. For instance, here are some important questions to consider:
- Is your monthly budget tight after meeting necessary expenses?
- Similarly, is your income variable and/or unpredictable?
- How long do I plan to stay in my home?
- Are you saving enough for retirement?
- Do you have an adequate emergency savings fund of three to six months of household living expenses?
- Do you have a lot of high-interest credit cards or loans?
- Assessing your financial goals, income and budget can help you decide whether it makes more sense to address other pressing financial concerns before paying ahead on your mortgage.
Once those bases are covered, paying extra towards mortgage comes down to discipline and comfort level. For instance, do you want to be completely debt free? Or would you prefer your money working harder for you in other ways? Ideally, you want to pay off your mortgage before retirement so you don’t have those monthly payments to worry about should your income become more limited.
Make sure you earmark any additional principal payments to go specifically toward your mortgage principal. Lenders typically have this option online or have a process for earmarking checks for principal payments only. However, if you are still unsure about prepayment, ask us if you have any additional questions.
Source: Bankrate
FAQs
Paying a little extra towards your mortgage can go a long way. Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you'll pay.
What happens if I pay an extra $100 a month on my mortgage principal? ›
An extra $100 per month can make a bigger impact than you might think with your loan because when you pay this additional sum every month, the entire amount goes toward bringing down your principal balance. Usually, a good portion of each regular monthly payment goes toward just reducing the interest that you owe.
What happens if I pay an extra $500 a month on my mortgage principal? ›
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
How can I pay off my mortgage faster by paying extra principal? ›
Split your monthly mortgage payment in half and pay that amount every two weeks. Another popular way to pay principal down faster is to pay your lender half your monthly payment amount every two weeks. This results in you paying an additional month's worth of payments over the course of a year.
What are the disadvantages of principal prepayment? ›
However, there are also potential drawbacks to consider:
- Liquidity Concerns. Prepaying your mortgage ties up your funds in your home, potentially leaving you with less liquidity for other financial needs or opportunities.
- Lost Tax Benefits. ...
- Opportunity Cost. ...
- Prepayment Penalties.
Options to pay off your mortgage faster include:
Pay extra each month. Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
How to pay off a 250k mortgage in 5 years? ›
There are some easy steps to follow to make your mortgage disappear in five years or so.
- Setting a Target Date. ...
- Making a Higher Down Payment. ...
- Choosing a Shorter Home Loan Term. ...
- Making Larger or More Frequent Payments. ...
- Spending Less on Other Things. ...
- Increasing Income.
Benefits of making principal-only payments
As you pay down the principal amount, your accrued interest becomes less and less. However, with precomputed interest loans, lenders front-load interest on your loan payments, so you benefit less from early payoff.
Is there a best time within the month to make an extra payment to principal? ›
Rather than delaying credit until the next month, the optimal day within the month to make an extra payment is the last day on which the lender will credit you for the current month.
Are there disadvantages to paying off a mortgage early? ›
Disadvantages of Paying Off Mortgage Early
If you have credit card or student loan debt, funneling your extra cash toward paying off your mortgage early can actually cost you in the long run. This is because these other types of debt likely have higher interest rates. Less money for savings.
Some banks allow you to write a check and mark it “principal only.” Others might require you to go into a branch or — or more conveniently — allow you to make a principal-only payment online or by phone. Even better, some lenders may automatically apply any extra payment to your principal balance.
What's the fastest way to pay down a mortgage? ›
Here are some ways you can pay off your mortgage faster:
- Refinance your mortgage. ...
- Make extra mortgage payments. ...
- Make one extra mortgage payment each year. ...
- Round up your mortgage payments. ...
- Try the dollar-a-month plan. ...
- Use unexpected income.
The additional amount will reduce the principal on your mortgage, as well as the total amount of interest you will pay, and the number of payments.
What happens if I pay an extra $400 a month on my mortgage? ›
If you increase the extra payment by $400 per month, you not only shorten your mortgage by nine years, you save $159,602 in interest.
