Do you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loans original payment terms.
Paying down the principal on your mortgage faster can save you thousands of dollars in interest and help you pay off your home loan years earlier. However, making extra principal payments does not directly reduce your monthly mortgage payment amount unless you recast the loan.
How Monthly Mortgage Payments Work
When you take out a fixed-rate mortgage the monthly payment amount is calculated based on the original loan amount, interest rate and loan term. Each monthly payment is made up of two components
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Principal – This portion of the payment goes towards reducing the outstanding loan balance.
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Interest – This covers the cost of borrowing the money, calculated as a percentage of the current principal balance.
In the early years of a mortgage the majority of each payment goes towards interest. As you pay down the principal over time the interest portion gets smaller and more of the payment is applied to principal.
The payment schedule is fixed for the life of the loan based on the original amortization. So making extra principal payments does not automatically adjust your payment amount unless the loan is recast.
Benefits of Paying Principal Faster
While extra principal payments do not directly lower your monthly payments, paying down your mortgage principal faster provides several valuable benefits:
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Saves money on interest – Since interest is calculated on the outstanding principal balance, paying down principal faster means you pay less interest over the life of the loan. This results in significant interest savings.
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Shortens loan term – When you pay extra towards principal, you will reach the point of paying off the mortgage much sooner than the original term.
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Builds home equity faster – Principal payments help you build equity, which is your ownership stake in the home. You build equity faster when you pay down the loan quicker.
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Peace of mind – Eliminating debt faster gives a sense of security and achievement.
How Much Could You Save?
Even small additional principal payments can make a big difference over the life of your mortgage. Here are some examples:
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On a $300,000 30-year fixed mortgage at 4% interest, paying an extra $100 per month would save over $29,000 in interest and shave 3 years off the loan term.
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Paying an extra $200 each month would save over $60,000 in interest and cut 6 years off the loan duration.
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On a $500,000 mortgage, $100 extra per month saves over $51,000 in interest and takes 5 years off the term.
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An additional $200 per month saves over $99,000 in interest and shortens a $500,000 loan by 9 years.
As you can see, even small increases in your payments can lead to substantial savings and a faster path to mortgage freedom.
Strategies for Making Extra Principal Payments
If you want to benefit from making extra mortgage principal payments, here are some strategies to consider:
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Round up payments – Increase your payment by rounding up to the nearest $100 or $1,000 increment. This simple step can make a big difference over time.
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Pay half monthly – Making biweekly half payments will result in one extra full monthly payment per year, accelerating your payoff.
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Lump sum additions – Use your annual bonus or tax refund to make one-time extra lump sum payments. This can shave years off your loan.
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Auto-pay additional amounts – Set up automatic payments to add extra principal each month. This takes the effort out of remembering to do it manually.
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Recast the mortgage – Ask your lender to recast the loan after making large lump sum payments. This will officially lower your monthly payments.
Should You Prioritize Extra Mortgage Payments?
When deciding whether to make extra mortgage payments, weigh the benefits against other possible uses of the money, such as:
- Paying off higher interest debt first
- Building up emergency savings
- Funding retirement accounts
- Investing for other goals
Make sure your overall financial plan aligns with your mortgage payoff goals. An accelerated mortgage repayment strategy may not always be the top priority for every homeowner. Evaluate your full financial picture.
The Bottom Line
Paying down your mortgage principal faster can allow you to save tens of thousands of dollars in interest and reach full homeownership many years sooner. While extra payments do not directly reduce your monthly amount due, the long-term benefits can make it a very worthwhile strategy over the life of your mortgage. Crunching the numbers for your specific situation can help you decide if prioritizing extra principal payments could help you achieve your home loan goals sooner.
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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.
How Do Principal Payments Work On A Home Mortgage?
FAQ
Can you overpay a mortgage to reduce monthly payments?
Regularly overpaying, or paying a lump sum could help you: Reduce the size of your mortgage, by paying off more of the interest and capital. Reduce the term of your mortgage, sometimes by quite a few years.
Does mortgage prepayment reduce monthly payments?
What is the 2% rule for mortgage payoff?
Is there a way to lower my monthly mortgage payment?
- Refinance your mortgage.
- Eliminate mortgage insurance.
- Consider recasting your loan.
- Look for cheaper home insurance.
- Ask about a mortgage modification.
- Appeal property taxes.
What happens if you pay down the principal on a mortgage?
Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. So, more of your monthly payment goes to paying down the principal. How can I lower the principal on my mortgage?
How does paying down a mortgage affect my monthly payment?
Most of your monthly payment is applied to the interest you owe, and the remainder is applied to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. This means that over time, more of your monthly payment goes to paying down the principal.
Does paying down the principal reduce interest on a mortgage?
Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you’ll pay. Even small additional principal payments can help. Here are a few example scenarios with some estimated results for additional payments.
Does paying down a mortgage pay off interest?
So most of your monthly payment goes to pay the interest, and a little bit goes to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. So, more of your monthly payment goes to paying down the principal.
How do I pay down my mortgage in less time?
Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment. When you split your payments like this, you’re making the equivalent of 1 extra monthly payment a year (26 bi-weekly payments totals 13 monthly payments).
Should I pay off my mortgage if my principal is too much?
You can specify that any additional funds be applied to principal when you make a payment that is greater than the minimum amount. Paying off your mortgage’s principal faster lowers the interest you pay because interest is computed against the principal balance. Even small additional principal payments can help.