## How Paying Extra Principal Affects Your Mortgage
Paying extra principal on your mortgage can be a smart financial move that can save you thousands of dollars in interest over the life of your loan. By making additional payments towards the principal balance of your mortgage, you can reduce the amount of interest you owe, shorten the term of your loan, and build equity in your home more quickly.
There are several ways to pay extra principal on your mortgage. You can make a lump sum payment, increase your monthly payment amount, or make bi-weekly payments. Each of these methods has its own advantages and disadvantages, so it’s important to choose the one that works best for you.
### Making a Lump Sum Payment
Making a lump sum payment towards the principal balance of your mortgage is a great way to reduce your interest costs and shorten the term of your loan. However, it’s important to note that making a lump sum payment will not affect your monthly payment amount.
For 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 $1,024. If you made a lump sum payment of $10,000, your new principal balance would be $190,000. Your monthly payment would still be $1,024, but you would save $2,436 in interest over the life of your loan.
### Increasing Your Monthly Payment Amount
Increasing your monthly payment amount is another way to pay extra principal on your mortgage. This method is more gradual than making a lump sum payment, but it can still save you a significant amount of money over time.
For 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 $1,024. If you increased your monthly payment by $100, your new monthly payment would be $1,124. This would reduce your principal balance by $1,200 each year, and you would save $22,956 in interest over the life of your loan.
### Making Bi-Weekly Payments
Making bi-weekly payments is a great way to pay extra principal on your mortgage without increasing your monthly payment amount. By making payments every two weeks instead of once a month, you will make an extra payment each year. This extra payment will go towards reducing the principal balance of your loan, which will save you money in interest over time.
For 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 $1,024. If you made bi-weekly payments, you would make 26 payments each year instead of 12. This would reduce your principal balance by $2,400 each year, and you would save $45,912 in interest over the life of your loan.
## Benefits of Paying Extra Principal
There are several benefits to paying extra principal on your mortgage, including:
* **Saving money on interest:** By paying extra principal, you can reduce the amount of interest you owe over the life of your loan. This can save you thousands of dollars in the long run.
* **Shortening the term of your loan:** Making extra payments towards the principal balance of your mortgage can help you shorten the term of your loan. This means you will pay off your mortgage sooner and build equity in your home more quickly.
* **Building equity in your home:** When you make extra payments towards your mortgage, you are building equity in your home. This means that you will have a greater financial stake in your home, which can make it easier to sell or refinance in the future.
## Disadvantages of Paying Extra Principal
While there are several benefits to paying extra principal on your mortgage, there are also a few disadvantages to consider, including:
* **Reduced cash flow:** Making extra payments towards your mortgage can reduce your cash flow. This is because you will have less money available to spend on other things, such as savings, investments, or entertainment.
* **Missed opportunities:** If you are using your extra money to pay down your mortgage, you may be missing out on other investment opportunities. For example, you could be investing in stocks, bonds, or real estate.
* **Prepayment penalties:** Some mortgages have prepayment penalties. This means that you may have to pay a fee if you make extra payments towards your mortgage.
## Conclusion
Paying extra principal on your mortgage can be a smart financial move that can save you thousands of dollars in interest over the life of your loan. However, it’s important to consider the disadvantages before making a decision. If you are considering paying extra principal on your mortgage, talk to your lender to learn more about your options.