Making extra principal payments on your mortgage can considerably reduce the amount of interest paid over the loan's life and shorten the loan term. This not only saves money but can also help you build equity faster. Here are some key benefits and methods to implement additional principal payments effectively:
Benefits of Extra Principal Payments:
Interest Savings: By paying extra towards the principal, you decrease the outstanding balance and, consequently, the interest charged over time. For example, on a 30-year loan of $200,000 at 4% interest, adding just $100 extra a month can save you more than $25,000 in interest and shorten the payoff term by over four years.
Faster Equity Growth: Extra payments increase your home's equity faster, providing you with more financial security and potential leverage for future borrowing.
Shortened Loan Term: Regularly paying more than the minimum can significantly reduce the duration of your mortgage. This accelerates the timeline to own your home free and clear.
Financial Flexibility: Reducing your mortgage balance faster can provide more flexibility for future financial planning, allowing for larger investments, savings, or achieving other financial goals.
Methods to Make Extra Principal Payments:
Biweekly Payments: Instead of making monthly payments, split your mortgage payment in half and pay every two weeks. This results in 26 half-payments or 13 full payments each year, effectively reducing your loan balance.
Round Up Payments: Simply round up your payments to the nearest hundred. For example, if your payment is $963, consider paying $1,000. The extra goes directly to the principal.
Lump Sum Payments: Use bonuses, tax returns, or gift money to make lump sum payments towards the principal when feasible.
Additional Specific Payments: Designate specific amounts as extra toward the principal when making your regular payment online or in your mortgage bill pay system. This ensures it’s applied correctly.
Considerations:
- Check with Your Lender: Before making extra payments, verify that your lender applies them to the principal immediately and verify any prepayment penalties.
- Budget Appropriately: Ensure that extra payments fit within your budget without impacting your ability to meet other financial obligations.
- Monitor Your Statements: Regularly review your mortgage statements to ensure that additional payments are applied correctly and promptly.