What Is The Effect Of Paying Extra Principal On A Mortgage?

Definition of "What is the effect of paying extra principal on a mortgage?"

Wondering what is the effect of paying extra principal on a mortgage – if there’s any?

Well, it actually does have a big effect and – if you do have available funds to do it - you should definitely take advantage of that.

By paying more than your set principal, you can shorten the term of your mortgage and, with that, pay less money in the end - since the principal you pay has interest added to it. In the end, by doing that, you can save thousands of dollars in interest. Yes, because when you pay extra to your principal it’s not like you are paying an extra payment. When you pay “extra” you skip the interest that would've been applied to that month payment. Plus, there are other effects like building equity faster – you can get to that sweet second mortgage to invest in other stuff – and improving your credit score – because companies will take note that not only you pay it back, but you pay faster than the average.

 This is such an important action that some people nickname it “prepay”.

 But there are drawbacks to it too.

 Well, you asked what is the effect of paying extra principal on a mortgage – you never specified you wanted the positive effects only…

 The one obvious downside of prepaying your mortgage is that you have less money lying around; plus while the benefits of prepaying your mortgage are nice, they are not the quickest of investments. So, sometimes it’s best to invest elsewhere and paying down other high-interest debt. Only you (or a financial adviser) can take a look at all your financial situation to assert the best option for your case.

 With all of that considered, we believe paying extra principal on a mortgage is a good idea when done from time to time. A good idea would be to save money so once a year you pay double the amount of a principal. For instance: say your principal is $2,000 per month. Save money so that every July (or whenever is the month you usually have fewer expenses) and try paying $4,000 or more that month. With the passing of years, you will get all the positive benefits of prepaying your mortgage. Good luck!

Real Estate Tips:

As soon as you start paying more than your principal asks, you will be able to do your refinancing. Listen to Cardi B’s advice and make that money move!

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Mortgage Questions

Popular Mortgage Glossary Terms

Fixed rate Mortgage is a type of loan that maintains a specified interest rate for the lifetime (or maturity) of the mortgage.According to the Federal National Mortgage Association, ...

A mortgage on which half the monthly payment is paid twice a month. It should be called a 'semi-monthly mortgage' but market practice often trumps logic. In contrast to a biweekly, a ...

A mortgage that does not meet the purchase requirements of the two federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons, such as poor credit or ...

Every ARM is tied to an interest rate index. An index has three relevant features:availibility, level, volatility. All the common ARM indexes are readily available from a published source, ...

Adjustable rate mortgages on which the interest rate is mechanically determined based on the value of an interest rate index. Indexed ARMs are distinguished from Discretionary ARMs, in that ...

Administering loans between the time of disbursement and the time the loan is fully paid off. Servicing includes collecting payments from the borrower, maintaining payment records, ...

The process of raising cash periodically through successive cash-out refinancings. This is a scam initiated by mortgage brokers that victimizes wholesale lenders, with the connivance of ...

An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrowers delinquency. ...

Mortgages typically amortize over time through fixed value installment payments. However, there's a type of mortgage that doesn't: the Balloon Mortgage. It's called this way because, with ...