Many financial gurus urge homeowners to make extra principal payments if possible. But what happens when you pay extra principal on a mortgage? If you’re hoping to save money and you have some wiggle room in your budget, learn about the handy strategies that help homeowners pay down their home loan’s principal at a faster rate.
What Happens When You Pay Extra Principal on a Mortgage?
As the Consumer Financial Protection Bureau explains, your monthly mortgage payment consists of a few different things. The principal is the amount that you borrowed, and a portion of your payment goes to paying that down. You’ll also be paying interest, which is a fee charged by the lender for the use of the money that you borrowed. In addition, your payment will likely include charges for insurance and taxes. What happens when you pay extra principal on a mortgage?
Build Equity Faster
Home equity is the portion of your home that you actually own. It’s the value of your home minus the amount owed on any mortgages or liens that you’re carrying that use the property as collateral. And as The Balance points out, it’s also an asset that you can borrow against to fund your retirement or to finance your next home purchase. Building equity faster moves you closer to owning your home outright, increases your net worth, and provides you with a means to take advantage of numerous financial opportunities.
Own Your Home Sooner
Are you looking forward to life after mortgage payments? Does the thought of paying off your mortgage and owning your home free and clear seem appealing? Then you may want to make extra principal payments. Paying more principal allows you to chip away at your debt ahead of schedule. While the results that you’ll see depend on how much extra principal you pay, many homeowners find that they can take years off the life of their loan with additional principal payments.
How much would you need to pay to trim the length of your loan by a few years? To find out, check out our handy Making Extra Monthly Payments Calculator. Simply enter some basic information about your loan and how much extra you plan to pay, and you’ll see both (1) the years until payoff without extra payments and (2) the years until payoff with extra payments. This makes it easy to compare the two options.
If you tried out our Making Extra Monthly Payments Calculator, then you may have noticed that it also reveals your total interest with and without extra payments, and the difference between the two can be substantial. How does paying more principal save you money? As Millionacres reports, the longer you carry a mortgage, the more interest you’ll pay. Each month, interest is charged as a percentage of the amount that you owe on the home. Since making extra principal payments reduces the amount that you’re being charged interest on, you ultimately pay less in interest, which can significantly reduce the total cost of your home loan.
Strategies for Paying Extra Principal
Clearly, paying off extra principal can lead to good things. How do you do it? Start by making sure to indicate that any extra payment you make should be put toward the principal. Then, try one or more of the ideas offered by Money Under 30:
- Use cash gifts, bonuses, and unexpected monies to make extra principal payments.
- Make one extra mortgage payment every year.
- Pay biweekly instead of monthly. Twenty-six biweekly payments each year equal 13 monthly payments, so you’ll automatically make an extra payment.
- Round up your normal mortgage payment. If your required payment is $541.14, get in the habit of paying $542, $545, $550, or whatever round figure suits your wallet.
When you have questions about mortgages, PrimeLending of Wichita, Kansas, has the clear, accurate answers that you need to make smart decisions. How can we help you find the right home loan product for your needs? Contact us today to find out.