Making principal-only payments is a great way to minimize the interest you will pay over the Life of the loan and you will pay off the loan quicker.
Given the choice, almost always better to pay principal over interest. That said, you will generally be required to pay off any interest that has accrued before devoting money to principal.
Prepayment penalties can equal a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If you're paying off your home loan well in advance, those fees can add up quickly. For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500.
Making additional principal-only payments on your mortgage can reduce the amount of interest you pay and also help you pay your loan off sooner.
It suggests that homeowners who can afford substantial extra payments can pay off a 30-year mortgage in 15 years by making a weekly extra payment, equal to 10% of their monthly mortgage payment, toward the principal.
You decide to increase your monthly payment by $1,000. With that additional principal payment every month, you could pay off your home nearly 16 years faster and save almost $156,000 in interest.
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
Dave Ramsey, the renowned financial guru, has long been a proponent of financial discipline and savvy money management. This can include paying off your mortgage early, but only under specific financial circumstances.
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
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.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
Both the principal and your escrow account are important. It is a good idea to pay money into your escrow account each month, but if you want to pay down your mortgage, you will need to pay extra money on your principal. The more you pay on the principal, the faster your loan will be paid off.
Extra payments made on your car loan usually go toward the principal balance, but you'll want to make sure. Some lenders might instead apply the extra money to future payments, including the interest, which is not what you want.
Since interest is based on the principal amount, with a fixed-rate mortgage, reducing your principal balance ahead of schedule will reduce the amount of money you'll pay in interest before it can accrue.
Orman's Cautions Against Paying Off Your Mortgage Early
Don't Drain Your Savings: Orman emphasizes that homeowners should not deplete their emergency savings or retirement savings to pay off their mortgage. These funds are crucial for financial stability and should not be sacrificed.
In fact, the average millionaire pays off their house in just 10.2 years. But even though you're dead set on ditching your mortgage ahead of schedule, you probably have one major question on your mind: How do I pay off my mortgage faster?
Making an extra mortgage payment each year could reduce the term of your loan significantly. The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you'll have paid the equivalent of an extra payment by the end of the year.
Make Extra Principal Payments
Putting just $200 more per month toward principal, you'd save $80,837 in interest and pay off the mortgage six years and four months earlier. To pay off this same mortgage in 15 years, however, you would need to put an extra $787 per month from the outset of the mortgage.
Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (including principal, interest, taxes and insurance). To gauge how much you can afford using this rule, multiply your monthly gross income by 28%.
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
Bi-weekly payments will save you 19,834 in interest, and will reduce the term of your loan from 30 years to 26.1 years. Pay off your home 4 years earlier with bi-weekly payments. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.