Wondering how to pay off your mortgage faster? Extra principal payments might be the answer. Here’s a breakdown of how it works and if it’s right for you.
How Extra Principal Payments Work
- What are they? Extra principal payments are additional payments you make on your mortgage, beyond your regular monthly payment.
- How do they work? These extra payments go directly to reducing your principal balance, rather than interest.
- Why do they matter? By reducing your principal balance, you’ll pay less interest over the life of your loan, saving you money.
The Pros of Extra Principal Payments
- Faster payoff: The most obvious benefit is a shorter mortgage term.
- Lower interest costs: Less time means less interest paid.
- Increased equity: Paying down your principal faster means you’ll build equity in your home more quickly.
The Cons of Extra Principal Payments
- Opportunity cost: Extra payments could be invested elsewhere, potentially earning a higher return.
- Flexibility: Extra payments can limit your ability to adjust to financial changes.
How to Make Extra Principal Payments
To ensure that your extra payment is applied to the principal balance rather than interest, you’ll need to be clear with your lender. Here are a few ways to do this:
1. Specify When Making the Payment:
- Online: When making your payment online, look for an option to specify that the extra amount should be applied to the principal.2
- Phone: When calling your lender, explicitly state that you want the extra payment to go towards reducing the principal balance.3
- Mail: Include a note with your check indicating your preference for the extra payment to be applied to the principal.
2. Set Up Automatic Payments:
- Principal-only payments: You can set up automatic payments that are specifically designated as principal-only payments.
- Biweekly payments: Paying half your monthly payment every two weeks effectively makes an extra payment each year, as you’ll make 13 payments instead of 12.4
3. Consult with Your Lender:
- Clarify the process: Ask your lender about their specific procedures for applying extra payments.
- Review your loan statement: Ensure that the extra payment is correctly applied to the principal on your monthly statement.
By taking these steps, you can maximize the impact of your extra payments and accelerate your mortgage payoff.
Remember: While extra principal payments can be a smart strategy, it’s important to consider your overall financial goals. Consult with a financial advisor to determine the best course of action for your specific situation.
Want to learn more about mortgage strategies? Feel free to reach out. We’re here to help.
