Can you make principal-only payments on your mortgage?

Each month, when you pay your mortgage bill, some of your payment goes toward accrued interest, and the rest goes toward principal, reducing the balance of your loan. Paying additional principal payments on your mortgage is one way to pay it off more quickly.

This can help you save money on interest, too, but it’s important to check with your lender before you make these payments and see if you may pay fees, such as an early repayment fee.

What is a principal-only payment?

Principal-only loan payments are extra payments that you make in addition to your typical monthly mortgage payment. The extra money goes directly toward reducing your loan’s principal versus interest. That means that less interest will accrue on your loan, letting you save money and pay the loan off ahead of the loan term.

Some lenders will automatically assign any additional payments toward principal. With others, you’ll need to reach out to the lender to indicate the extra payments go toward principal and not interest.

How can making additional principal payments help?

As you pay regular payments on a loan like a fixed-rate mortgage, the loan amortizes. Amortization is the process through which the principal balance of the loan goes down over time. Your lender should have provided you with a mortgage amortization schedule that you can review to see how your payments get divided over the life of the loan.

When you get a mortgage, your payments will go toward the loan principal and interest. In the beginning, most of your monthly payment goes toward paying for interest, and only a small portion goes toward the principal. As the balance goes down, less interest accrues, and a greater portion of each payment goes toward principal.

Additional principal payments help the loan amortize more quickly. Because the principal balance gets reduced, less interest accrues each month, helping you pay the loan off more quickly and save money on interest overall.

Do large principal-only payments reduce monthly payments?

No, making principal-only payments won’t lower your monthly mortgage payments automatically. Instead, they’ll speed up your loan’s amortization, letting you pay down the loan more quickly.

However, you can request a mortgage recast. During recasting, you make an additional principal payment plus pay a small fee. The minimum principal payment required by Mr. Cooper when a mortgage is recast is a lump sum of $10,000. Rocket Mortgage@ also requires that $10,000 be applied to the principal since the mortgage closed or was most recently refinanced but it doesn’t have to be paid as a lump sum. It may be applied through regular mortgage payments. The mortgage on the property must also be current. Contact either company for more details and requirements.

When you recast, the lender recalculates your monthly payment based on the original end date of the loan and its new principal balance. This reduces your monthly payment while keeping the loan’s interest rate and term the same.

How to make a principal-only mortgage payment

If you want to make principal-only mortgage payments, the first thing you should do is reach out to your lender to ensure that extra payments are permitted and to confirm that they’ll go toward principal.

Once you’ve verified that the lender will handle the payments properly, you can submit the payments the same way you send your typical monthly payments.

There are a few ways to budget for making these extra payments, such as by sending any windfalls toward your mortgage balance, adding a bit of extra money to your monthly payments, or saving money over the course of the year to make a big extra payment at the end of the year.

Pros and cons of additional principal-only payments

Making principal-only payments can help you save money, but you should also consider the drawbacks before you start making extra payments.

Pros

Some good reasons to make principal-only payments toward your mortgage include:

• Save on interest: Borrowers can save money on interest by paying more than they owe every month.
• Shorten your loan term: Paying down your balance shortens your loan term and pays off your mortgage early.
• Supports your financial goals: Paying off your mortgage earlier allows you to use that money for other financial goals.

Cons

Consider these drawbacks before making extra payments toward your loan.

• Potential fees: Some banks may charge you a fee(s) for extra payments. Rocket Mortgage® doesn’t.
• Prepayment penalties: Your lender may charge a prepayment penalty if you try to pay your loan off early. Rocket Mortgage® charges no prepayment penalties.
• Less funds: Making extra payments means you don’t have money to use for other financial goals, like building an emergency fund or investing.

Alternatives to making extra principal-only payments

If you’re looking for ways to save money on your mortgage, consider these other options.

Biweekly mortgage payments

One way to save money on your mortgage is to make biweekly mortgage payments rather than monthly payments. This works very similarly to making extra principal payments because it effectively means making one more payment per year.

There are 12 months in a year but 52 weeks a year. If you make one-half of a monthly payment every other week, that’s 26 payments, the equivalent of 13 monthly payments. That means you’ll pay your principal down more quickly and shorten the term of your loan.

Refinancing

Refinancing your mortgage involves applying for a new loan and using the proceeds to pay off your old one. You can refinance to adjust the interest rate of your loan or its term. For example, refinancing to a 15-year loan may help you pay the loan off more quickly, while refinancing to a 30-year mortgage will likely lower your monthly payment.

If you can lower your loan’s rate by refinancing, that can also reduce your monthly payment and help you save money in the long run.

FAQ

It’s common to have questions about making extra payments toward your mortgage. Consider these questions before committing to extra payments.

Is it better to pay the principal vs. interest on a mortgage?

Yes. In general, principal-only payments are better than letting extra payments go toward interest because principal payments reduce the loan’s balance. That slows the rate at which interest accrues, saving you money and helping you build home equity.

Do principal-only payments lower monthly payments?

No, principal-only payments will not lower your monthly payments on their own. To change your loan’s monthly payments, you need to refinance the loan, recast it, or work with your lender to change the payment another way.

Are there states that don’t allow principal-only payments?

Principal-only mortgage payments are allowed in every state. However, not all lenders allow borrowers to make principal-only payments, so check with your lender first. Rocket Mortgage does permit principal-only payments.

The bottom line: Principal-only payments might help you save money in the long run

Principal-only payments help you reduce the balance of your mortgage. That can help you save money on interest and pay your loan off more quickly. However, it’s important to check with your lender to make sure these payments are allowed and the lender properly applies them to your loan principal.

If you’re looking to adjust the terms of your mortgage or want to work with a lender that allows principal-only payments, apply for a refinance with Rocket Mortgage.

Refinancing may increase finance charges over the life of the loan.