Is it Wise to Pay Extra Principal on My Mortgage?

Owning a house is an exciting dream come true for many people. However, the amount of money that goes toward interest is not! Paying off your home early could save you thousands and thousands of dollars in interest alone. The sooner you pay off your home, the sooner you can enjoy financial freedom.

If you are interested in paying off your home early, keep reading to learn more.

Your monthly mortgage is comprised of three or four parts. The first of these is the principal, which is the total amount of money you borrowed. Part of each payment will go towards repaying this debt. The second part is the interest. This is a fee your lender charges to borrow their money. Thirdly, you pay 1/12 of your real estate taxes each month. Lastly, part of your payment goes towards insurance if required.

As mentioned above, only a small part of your mortgage goes toward paying off the principal. A vast majority of your payment goes towards interest. You will be paying interest as long as you owe the principal. By paying an additional amount towards the principal, you reduce the amount of principal owed. As the amount of principal reduces, the amount of interest also reduces. This can help you pay off your home loan sooner. By paying extra principal each month, you can save a lot of money in the long run.

Depending on your financial situation and the financial goals you have, paying an additional amount towards your principal may be beneficial. If you have extra money you can devote towards paying down principal and your interest rate is high, you may want to consider it. Your money will be tied up because you’ve allocated your extra cash. But if liquid cash is more important to you or you already have a lower interest rate, it may make more sense for you to put your extra money elsewhere (such as another goal or other venture).

If you decide to make additional payments towards the principal, you need to let your lender know to apply that money to your principal. Here are a few ideas for making extra principal payments:

Use Unexpected Money — Any time you receive “extra” money, such as a tax return, bonus, credit card rewards, or any other unexpected cash, put it towards your principal.

Round-Up — If you are financially able, round up your mortgage payment each month. For example, if you owe $935 monthly, round it up to $950 or $1,000.

Make 13 Payments Each Year — Make an additional payment each year. To make it financially easier, you can divide your monthly payment by 12 and pay the extra amount with each month’s payment.

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