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!