Paying Extra Towards your Principal (2024)

FAQs

Paying Extra Towards your Principal? ›

Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.

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.

Paying more toward your principal can reduce the interest you'll pay over time. Because every payment that goes toward the principal builds equity in your home, you can build equity faster with additional principal-only payments.

When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).

Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.

If you buy a $300,000 house with a 30-year mortgage and a 5.7% interest rate, you could save $84,223 in interest by paying an extra $200 every month — and pay off your mortgage 6.67 years sooner.

Payments made on a mortgage in addition to your regular monthly payment will count toward the loan principal. Extra payments can be beneficial because they apply directly to your loan principal, helping you pay off your loan faster and with fewer interest fees.

Rather than delaying credit until the next month, the optimal day within the month to make an extra payment is the last day on which the lender will credit you for the current month.

By making a small additional monthly payment toward principal, you can greatly accelerate the term of the loan and, thereby, realize tremendous savings in interest payments.

When you prepay your mortgage, you pay extra toward the loan principal to help pay your loan off sooner and save money on interest. There are many ways to prepay a mortgage, including through biweekly payments, periodic extra payments or a lump sum.

At what age should you payoff your mortgage? ›

You should aim to be completely debt-free by retirement, and after age 45 you can begin thinking more seriously about pre-paying your mortgage. The opportunity cost of paying off your mortgage before investing for retirement is very high when you are young.

Regardless of the amount of funds applied towards the principal, paying extra installments towards your loan makes an enormous difference in the amount of interest paid over the life of the loan.

Applying extra payments toward your principal can help you pay down a 30-year mortgage faster without being locked in to a 15-year time frame. Run the numbers to decide whether the flexibility will be worth it, since 30-year loans often come with higher interest rates.