Paying Down the Principal on Your Student Loans Is Crucial
No matter which payment plan you choose for your student loans, you must start paying the principal down so you can repay the whole loan; making minimum payments on accrued interest will not get rid of your student loan debt.
In the beginning, you owe more interest, because your loan balance is still high. So most of your monthly payment goes to pay the interest, and a little bit goes to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower.
Making principal-only payments can lower the total interest paid on the loan. When you pay down your loan balance, the interest that accrues on that balance typically also decreases.
Paying additional principal on your mortgage can save you thousands of dollars in interest and help you build equity faster. There are several ways to prepay a mortgage: Make an extra mortgage payment every year. Add extra dollars to every payment.
In this scenario, an extra principal payment of $100 per month can shorten your mortgage term by nearly 5 years, saving over $25,000 in interest payments. If you're able to make $200 in extra principal payments each month, you could shorten your mortgage term by eight years and save over $43,000 in interest.
Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.
Putting extra cash towards your mortgage doesn't change your payment unless you ask the lender to recast your mortgage. Unless you recast your mortgage, the extra principal payment will reduce your interest expense over the life of the loan, but it won't put extra cash in your pocket every month.
Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
The additional amount will reduce the principal on your mortgage, as well as the total amount of interest you will pay, and the number of payments. The extra payments will allow you to pay off your remaining loan balance 3 years earlier.
When you make a principal-only payment, that entire amount goes toward paying off the principal on the loan instead of the interest. In most cases, principal-only payments are made in addition to your regular monthly payment.
While mortgage rates are currently low, they're still higher than interest rates on most types of bonds—including municipal bonds. In this situation, you'd be better off paying down the mortgage. You prioritize peace of mind: Paying off a mortgage can create one less worry and increase flexibility in retirement.
Both a 15-year and 30-year mortgage can have fixed interest rates and fixed monthly payments over the life of the loan. However, a 15-year mortgage means you will have your home paid off in 15 years rather than the full, 30-year mortgage so long as you make the required minimum monthly payments.
So, for this example you would type =PMT(. 05/12,60,200000). The formula will return $3,774. That's the monthly payment you need to make if you want to pay off your home mortgage of $200,000 at 5% over five years.
You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says. “The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s,” O'Leary says.
Regardless of the amount of funds applied towards the principal, paying extra installments towards your loan makes an enormous difference in the amount of interest paid over the life of the loan. Additionally, the term of the mortgage can be drastically reduced by making extra payments or a lump sum.
If you decide you can't afford your overpayments, you can reduce or stop them at any time and go back to your original monthly mortgage repayment. Paying a lump sum off your mortgage will save you money on interest and help you clear your mortgage faster than if you spread your overpayments over a number of years.