How to make a principal-only payment on your mortgage
Quick insights
- A principal-only payment goes directly towards reducing your outstanding principal balance versus other costs like insurance, property taxes and loan interest.
- If you want an extra payment to go directly to the principal you must specific this to your lender before submitting the payment.
- Making principal-only payments can save you on interest over the life of the loan and help you build equity in the home faster.
Buying a home is an exciting experience. There's nothing like receiving the keys to your home, especially after you’ve worked so hard to save for a down payment and qualify for a loan. But there are many responsibilities that come with owning a home. At the top of this list is your monthly mortgage payment.
Like many homeowners, your mortgage payment can be your largest monthly expense. The thought of paying hundreds or thousands of dollars a month for decades can be overwhelming. However, making additional principal-only payments on your mortgage can reduce the amount of interest you pay and help you pay your loan off sooner.
What is a principal-only payment?
Monthly mortgage payments cover things like insurance, property taxes, interest on the loan and then your principal balance. A principal-only payment is an extra payment that only goes towards reducing your outstanding principal balance.
How to make a principal-only payment
The key is to specify to your lender that you want your extra mortgage payments to be applied to your principal. If you don't make this clear, you may find the extra payment going toward the interest you owe rather than the principal. Regardless of how you make your mortgage payment, here’s how to ensure the extra dollars you contribute go towards principal:
- Online payments: If you’re set up with online banking, sign in to your account and look for a button or option that allows you to make a payment. Many lenders offer the option to put money toward your principal. Select that option and specify your amount and date.
- Phone payments: You can call your lender to make an additional payment toward your principal. Have your account information ready when you call, and make sure to receive confirmation before making a lump-sum payment.
- In-person payments: If you prefer to make your payment in person, or if you would like more information, visit your local branch. Bring a check, cash or your bank account information, and confirm that you want your payment applied to the principal.
- Regular Mail: Your paper statement typically will typically include a line item for where you want your excess payment to be applied.
Why make extra mortgage payments?
During the first several years of your loan, the bulk of your mortgage payments go toward interest. The portion of your payment devoted to the principal, on the other hand, may seem surprisingly small. Here are some of the benefits of reducing your principal and paying off your mortgage early:
Save on interest
The interest you pay each month is calculated using your principal balance. As your principal balance decreases, your interest goes down as well. You could potentially save thousands of dollars in interest over the life of your loan by paying down your principal faster.
Devote cash to other things
Once you make your final mortgage payment, your cash flow immediately improves. You can then begin funneling the money you were putting toward your mortgage to other things. For example, you can pay off other debts, contribute more to retirement or invest the money.
Access the equity in your home
Once your home loan has sufficient equity or is paid in full, you may be able to tap into your home's equity. Whether you need to add a mother-in-law suite to accommodate an aging parent or cover some unexpected medical expenses, your chances of being approved for a home equity line of credit (HELOC) can improve when you have sufficient equity or own your home.
Safeguard your homeownership
Recessions, pandemics and job loss can all potentially cause people to fall behind on monthly payments. While homeownership is certainly not a magical solution, paying your mortgage off early eliminates a large expense you would otherwise face during a crisis.
Drawbacks to paying down your principal early
Budgeting
Paying down principal requires discipline and dedication for long-term benefits. You’re using money you could spend on other things, like a vacation or a nicer car, or it could be earning interest if invested elsewhere.
And if you lack an emergency fund, you should think twice before putting an unexpected cash infusion toward your mortgage.
Higher interest debt
Paying extra money toward your mortgage can also hinder your ability to pay off debts with higher interest rates
Prepayment penalties
Finally, some lenders may charge prepayment penalties for additional principal payments or early payoff. Make sure you ask about any extra fees.
Ways to pay down your mortgage principal faster
Accelerating your mortgage principal payments is a smart way to save on interest and get you closer to financial independence. Using an extra payment calculator,tools-and-calculator-hl000066 you can see how options like making one additional payment per year or scheduling bi-weekly payments can help you reach your goals sooner. Below are some methods you can use to pay down your mortgage.
1. Make one extra mortgage payment every year
Making just one additional payment toward your principal a year can help cut into your loan term, reducing the life of your loan. This method reduces the total amount of interest you pay, while helping you fast-track your mortgage payoff. Making one extra payment toward principal every year is a good option for homeowners who usually receive one or more of the following:
- A year-end or lump-sum bonus from an employer
- A yearly tax refund
- An annual monetary gift from a family member or loved one
2. Schedule recurring principal-only payments
Making a large payment can be a bit intimidating to some people. However, you can achieve similar benefits by making small monthly principal-only payments on a recurring basis. Over a year, small monthly payments can add up to a large annual amount.
This strategy works well for people who have a dependable second source of income such as a part-time job or monthly income from a rental property.
3. Set up bi-weekly mortgage payments
Another popular way to pay principal down faster is to pay your lender half your monthly payment amount every two weeks. This results in you paying an additional month's worth of payments over the course of a year. For example, rather than making 12 payments of $2,000 for a yearly total of $24,000, you would make 26 total payments of $1,000 for a total of $26,000.
This strategy is a good choice if your employer pays you every two weeks instead of once or twice per month. Here's how it works:
- Divide your monthly mortgage payment in half to see how much you’ll pay every two weeks.
- Work with your lender to set up automatic flexible payments from your account.
- Two months per year, you’ll make an extra half payment. Those payments are applied to your principal.
4. Round up monthly payments
Mortgage payments rarely end in an even multiple of $100 and zero cents. By rounding up to the next $100 and putting the difference towards principal, you’ll end up paying less in interest. For instance, if your current payment is $1,527 per month, you can pay $1,600 per month. By the end of the year, you’ll have paid $876 extra toward your principal.
5. Use a combination of methods
Today's lenders make it easy for homeowners to use a variety of methods to pay down their principal faster. You’re not limited to using only one of the methods above. If your income or expenses tend to fluctuate, you can make extra payments whenever you’re able.
In summary
If you’re eager to find a way to pay off your mortgage faster, talk to a Home Lending Advisor. Whether you're an existing homeowner who wants to pay down your principal faster or you’re planning to buy your first home, we’re here to help.
There are many ways to pay off your principal faster. A qualified Home Lending Advisor can help you understand the pros and cons of each strategy so you can choose the option that best meets your needs.
