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Additional Principal Payments: Should You Be Making Them?

Ashley Kilroy3-minute read

April 20, 2021

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After purchasing a home, you must begin chipping away at your mortgage loan. Depending on the borrower, you may be looking at 30 years of fixed payments. This may leave you wondering how you can pay it down faster? One option is to make additional principal payments. Tacking on these extra payments can sometimes help with interest and shorten the mortgage’s lifespan, but are they right for you? This article will tell you the essential information you need to know about additional principal payments.

What Is An Additional Principal Payment?

An additional principal payment is a supplementary payment applied directly to your mortgage loan principal amount. It exceeds the scheduled monthly amount; thus, possibly saving you on interest and helping you to pay off your mortgage early.

You may have to notify your lender that you want to put the extra funds toward your principal and not the interest.

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How Can Making Additional Mortgage Payments Help?

When you make your mortgage loan payments, your money is portioned to cover two costs: the principal amount and the interest. Once you begin making these payments, a process called amortization begins. You can review your amortization schedule to see how much of your own monthly payment goes toward the principal and interest.

Most of the money is dedicated to interest during the first few years. Since the interest is based on the principal amount, reducing the latter ahead of schedule on a fixed-rate loan affects your interest.

So, making additional principal payments reduces the amount of money you’ll pay interest on – before it can accrue.

How To Make An Additional Principal Payment

Consider budgeting some extra money on a monthly basis to make an additional principal payment toward your principal balance. You have several ways you can go about this. One is to make more frequent payments or wait to gather them into one large annual payment. Alternatively, you could pay a greater sum on each monthly installment which can help you avoid possible fees. Lastly, you can wait until you have an influx of money, such as after receiving a gift or an inheritance.

Make sure to double-check with your lender that the extra payments are credited directly toward your principal.

Pros And Cons Of Additional Principal Payments

Now that you know the basics, consider the following benefits and drawbacks of making additional principal payments:

Pros

  • Borrowers can save money on interest by paying more than they owe every month.
  • Paying down your balance can shorten your loan term and pay off your mortgage early.
  • It gives you the opportunity to focus your attention on other debt and improve your financial standing.
  • Paying off your mortgage earlier allows you to use that money elsewhere (after it’s completely paid off).

Cons

  • Some banks may charge you a fee (or fees) for making extra payments every month.
  • Paying your loan off early could subject you to a prepayment penalty from your lender.
  • Making extra payments means you can’t use that money for something else, like building up an emergency fund or investing.

Alternatives To Making Extra Principal Payments

There are some alternatives to making additional principal payments. Consider the following:

Bimonthly mortgage payments. Having a bimonthly payment plan can save you on interest by splitting your monthly payment into two half-payments, which reduces the principal balance as your lender receives it. This payment method may shorten your loan term but by no more than a month.

Biweekly mortgage payments. Setting up biweekly mortgage payments can give a borrower an extra full monthly payment per year. This will cut down on accumulating interest and can shorten your loan term by years.

Refinancing. Refinance your longer-term mortgage with a shorter term, like a 30-year fixed-rate one, into a 15-year loan. It can also help you pay down your loan sooner. Your lender may lower your interest rate as a result, although more of your monthly installment will go to the principal portion.

The Bottom Line

Even a small additional principal payment can save you thousands of dollars in interest down the road. Although, there are plenty of options to explore if you want to pay off your loan ahead of schedule. If you’re ready to take the next step in your own financial situation, get started today with Rocket Mortgage®.

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Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.