Paying extra principal has a variety of benefits for homeowners, including a significant effect on the loan’s amortization table. The more extra principal you are able to pay, the more pronounced these benefits will be.
Each month, your loan payment is divided into several components: principal, interest, homeowner’s insurance and property taxes. The portion of the payment that goes toward principal reduces the loan balance directly, while the other portions of the payment cover other expenses related to the loan.
Making Extra Principal Payments
Making extra payments toward your loan’s principal each month offers the following benefits:
- A lower loan balance – Each time you pay extra principal, your loan balance decreases faster than it would have with only the required payment.
- Shorter loan term – Reducing your loan balance faster than your original amortization table requires will shorten your loan’s term, allowing you to pay the balance in full at an earlier date.
- Less interest paid – Paying off your loan balance faster will reduce the total amount of interest you pay over the life of the loan.
- More equity in the home – The more extra principal you pay, the more equity you will have in your home. Not only does this increase the value of your home as an asset, but it will also be beneficial if you decide to sell the home, request a cash-out refinance or take out a second mortgage.
How Much Should You Pay?
Depending on your circumstances, you may decide to make extra principal payments every month, a few times each year or only when you have extra money. Regardless of when you make your payments, they will still reduce your loan balance. Keep in mind that some mortgages come with a condition known as a “prepayment penalty,” which penalizes you for paying your mortgage off early. If your loan includes such a condition, contact Starboard Financial to find out how it may affect your ability to make extra principal payments.