If you have a fixed-rate loan with a term of 15 or 30 years and would like to pay it off sooner, you may be able to do so by making extra mortgage payments, which will allow you to pay back the loan faster and for less interest than if you were to make the original payments as stipulated by the loan.
No, your monthly payments on a fixed-rate mortgage won’t go down if you just pay the principal. On the other hand, it can shorten the loan’s term and drastically lower the total amount of interest you pay, saving you money over time.
Here’s how it works:
- Fixed-rate mortgages have a set interest rate and monthly payment for the entire loan term.
- Each payment is divided into principal (the amount borrowed) and interest (the cost of borrowing).
- Making extra principal-only payments reduces the outstanding principal balance faster, meaning less interest accrues over time.
- With less interest accumulating, you’ll pay off the loan sooner, saving you money on interest charges.
While your monthly payment won’t decrease immediately, the benefits of making extra principal payments are substantial:
- Reduced total interest paid: By paying down the principal faster, you’ll pay less interest over the life of the loan. This can save you thousands, even tens of thousands of dollars, depending on the loan amount and interest rate.
- Shorter loan term: Paying down the principal faster can shorten the loan term by years, allowing you to become debt-free sooner. This can free up your monthly budget for other financial goals.
- Increased equity: As you pay down the principal, you build equity in your home faster. This can be beneficial if you plan to sell your home in the future.
Here’s an example:
- Let’s say you have a $200,000 mortgage with a 4% interest rate and a 30-year term.
- Your monthly payment would be $955.
- If you make an extra $100 principal payment each month, you could pay off your loan in 24 years and 8 months, saving over $44,000 in interest.
Before making extra principal payments consider the following:
- Check your loan agreement: Some loans may have prepayment penalties, which could offset the benefits of making extra payments.
- Ensure you can afford the extra payments: Making extra payments should fit comfortably within your budget.
- Consider other financial goals: You may have other financial goals, such as saving for retirement or investing, that you should prioritize before making extra mortgage payments.
Increasing your mortgage’s principal payments is a wise financial decision that can result in large long-term savings. But it’s crucial to take into account your unique situation and make sure it fits with your overall financial objectives.
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Do you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loans original payment terms.
What is mortgage amortization?
The process of reducing debt through consistent principal and interest payments over time is known as mortgage amortization. For instance, when you make a monthly mortgage payment, part of it goes toward principal reduction and part goes toward interest.
Usually, interest is paid on top of the principal balance at the start of the loan term, with the majority of each payment going toward interest. Assuming regular payments, more of each following payment pays down your principal. This reduction of debt over time is amortization.
How Do Principal Payments Work On A Home Mortgage?
FAQ
Will paying principal lower monthly payments?
What happens to mortgage payment when you pay down principal?
How can I lower my monthly mortgage payments?
What happens if I pay an extra $100 a month on my mortgage principal?
What happens when you pay down a mortgage?
Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. So, more of your monthly payment goes to paying down the principal. Near the end of the loan, you owe much less interest, and most of your payment goes to pay off the last of the principal. This process is known as amortization.
Does paying down a mortgage pay off interest?
So most of your monthly payment goes to pay the interest, and a little bit goes to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. So, more of your monthly payment goes to paying down the principal.
What happens if you pay off your mortgage each month?
Each month, part of your monthly payment will go toward paying off that principal, or mortgage balance, and part will go toward interest on the loan. Interest is what the lender charges you for lending you money. Most people’s monthly payments also include additional amounts for taxes and insurance.
What if I used a lump sum to pay down my mortgage?
If you used a $10,000 lump sum to pay down your mortgage, you’d shave off 10 months—and $13,500 in interest—from your original payment plan. However, your normal monthly payment would still be due the next month. You can’t pay ahead on your mortgage to take breaks on your payments later if you run into a tough financial patch.