Can I Make Principal-Only Payments On My Mortgage?
After purchasing a home, you must begin chipping away at your mortgage loan. Depending on the term, you may be looking at 30 years of fixed payments, made up of principal and interest. This may leave you wondering how you can pay it down faster. One option is to make additional principal-only payments. Tacking on these extra payments can sometimes help with interest and shorten the mortgage's lifespan, but are they right for you?
This article will tell you the essential information you need to know about principal-only payments, and how it can help you pay down your mortgage faster.
What Is A Principal-Only Payment?
A principal-only payment is an additional payment made in addition to your regular mortgage payments, which only goes towards the loan’s principal balance. This type of payment can be a one-time or ongoing, and it helps reduce the overall cost of the loan by reducing its principal balance more quickly than regular payments would. With each successive payment, the amount of interest that must be paid on the loan decreases.
How Can Making Additional Principal Payments Help?
Making additional principal payments can help to reduce the amount of interest that you pay over the life of the loan. This is because with each payment, a larger portion goes towards paying down the principal balance, rather than simply towards interest. As the principal balance decreases, the amount of interest that must be paid on the loan decreases as well. This can result in substantial savings over the life of the loan.
For example, if you were to make a principal-only payment of $200 on top of your regular mortgage payment each month, over the course of 10 years you would save nearly $9000 in interest payments and pay down your loan balance by more than $25,000.
Do Large Principal-Only Payments Reduce Monthly Payments?
Large principal-only payments can reduce monthly payments, but this depends on the total term of the loan and how often these payments are made. Generally, if a large principal-only payment is made as a one-time lump sum, it will reduce the loan balance immediately, resulting in a lower monthly payment.
However, if principal-only payments are made on an ongoing basis, the monthly payment will not be reduced. This is because the loan term and interest rate remain the same, so when a principal-only payment is made each month, it simply reduces the total amount of interest that must be paid over the life of the loan.
How To Make A Principal-Only Mortgage Payment
Making a principal-only payment on your mortgage is a great way to save money and pay off your loan faster. To make a principal-only payment, you must first contact your lender or mortgage servicer and request an additional payment option. Depending on the lender, you may be able to make a one-time lump sum payment or ongoing, periodic payments.
Once the payment is set up, you can make your principal-only mortgage payment through a variety of methods, including online banking transfers, checks sent in the mail, or paying directly at the lender’s office. When making your payment be sure to specify that it is for principal-only and not for interest.
Pros And Cons Of Additional Principal-Only Payments
Pros-
Making additional principal payments can offer some significant benefits that can help save money and pay off the loan faster. One of the primary advantages is that it can help reduce the amount of interest paid over the life of the loan. Because a large portion of each payment goes directly to reducing the principal balance, less interest will accumulate in comparison to regular payments.
Additionally, principal-only payments can help reduce the overall cost of the loan by shortening the term. By making large principal payments more frequently, you can pay off your loan earlier and avoid paying interest over a longer period.
Cons-
Unfortunately, there are some risks associated with making additional principal payments that should be considered. One of the primary disadvantages is that if you are unable to make regular payments on time or need to access funds, you may not be able to borrow against the loan or tap into any equity that has built up in your home.
Also, if you find yourself in a financial bind and need to reduce your monthly payments, making additional principal payments may not be an option. This is because the loan term and interest rate remain the same, so additional payments will not result in lower monthly payments.
Alternatives To Making Extra Principal-Only Payments
If making extra principal-only payments is not an option to reduce your monthly payments, there are other alternatives available. A popular alternative is refinancing the loan with a new lender or mortgage servicer who offers a lower interest rate or longer loan term. Refinancing can help lower the monthly payment on a loan by reducing the interest rate, extending the loan term, or a combination of both.
Another option is to obtain a loan modification from your lender. A loan modification can change the terms of a loan such as the interest rate, principal balance, or even the length of time you have to pay back the loan. This may reduce your monthly payment and help make it more affordable.
Finally, if you want to reduce your monthly payments without refinancing or modifying the loan, you may consider applying for forbearance or deferment with your lender. This will temporarily lower or suspend the payment due on a loan while keeping it in good standing. These options are only available in certain circumstances and require approval from the lender.
Conclusion
Making a principal-only payment on your mortgage is an excellent way to save money over the life of the loan and pay it down faster. However, it's important to understand the risks. Before making additional payments, always check with your lender to make sure that you are doing it correctly. You should also consider the financial implications before making a large principle-only lump sum payment, as it may not reduce your monthly payments but will still help you save money on interest in the long run.
