Should I pay extra principal on my mortgage? Many homeowners find themselves pondering this question. If you’re one of them, exploring the pros and cons of paying extra principal and reviewing some common strategies for making extra principal payments can help you find the answer that’s right for you.
Should I Pay Extra Principal on My Mortgage?
What is principal? As Investopedia explains, the principal is the amount that you borrowed when you took out your mortgage. Over time, it decreases as you pay it back.
However, the principal is not the total amount owed to your lender. You’ll also need to pay interest, which is basically a fee paid to the lender for the privilege of borrowing money. The amount of interest that you’ll ultimately pay is determined by your interest rate and the principal owed.
When you make your regular mortgage payment, it’s divided between principal, interest, taxes, and insurance. If you choose to pay extra, you can ask your lender to put the amount toward the principal balance.
The Benefits of Making Extra Principal Payments
Why should I pay extra principal on my mortgage? Putting more money towards the principal reduces your debt faster. As The Balance notes, this in turn allows you to increase your equity, which is your share of ownership in your home, at a faster pace. Equity is an asset that can be used for a variety of purposes, and building it nurtures your net worth and creates new financial opportunities.
Having more equity also means that you’re closer to owning your home outright, so if you want to live mortgage-free sooner rather than later, paying extra principal payments is an effective strategy. In fact, making extra principal payments can shrink both the length and overall cost of your home loan. As The Motley Fool explains, interest is assessed each month as a percentage of the remaining principal. Extra principal payments reduce this balance, so you’re charged less interest. Over time, this can produce significant savings. How much time and money would extra principal payments save you? To find out, try PrimeLending’s Making Extra Monthly Payments Calculator. After entering your information, you’ll be able to see both the years until payoff and the total interest owed without any extra payments and with your proposed extra payments, so you can easily compare the numbers.
The Downside of Making Extra Principal Payments
Although making extra principal payments has some appealing advantages, it does come at a price. As The Mortgage Reports reports, putting extra towards your principal has an opportunity cost. After all, when you use funds to make extra principal payments, you forgo the chance to use that money elsewhere to achieve other goals. When deciding whether to pay down your principal, you need to think strategically. Are you eager to build equity or intent on paying off your mortgage before you retire? If so, paying extra principal makes sense. Is high-interest credit card debt a concern? Do you need to grow your emergency fund or retirement savings? If your mortgage has a low interest rate, concentrating on those issues may be a better use of your resources than extra principal payments.
Strategies for Making Extra Principal Payments
When it comes to making extra principal payments, there’s a lot of flexibility, so it’s easy to choose a method that suits your situation. However you decide to do it, you’ll want to make to tell your lender that you want your extra payment to be applied to the principal.
If you’re wondering how you can make extra principal payments, Nationwide offers a few ideas:
- Make occasional extra payments. When you receive bonuses, tax refunds, credit card rewards, and other windfalls, put them toward your principal.
- Make a small extra principal payment each month. Round up your regular mortgage payment. If $859 is due, pay $875 or more instead.
- Pay a 13th mortgage payment each year. Divide your payment by 12. Add that amount to each month’s payment.
When you have questions about home loans, turn to PrimeLending Kansas City. We would be happy to guide you through the process of identifying and securing the right loan product for your housing goals. Contact us today to get started.