Is It Better to Make Extra Principal Payments or Extra Mortgage Payments?

Is It Better to Make Extra Principal Payments or Extra Mortgage Payments

If you’re like most Americans, your mortgage is your household’s single largest expense. Even if you own a nice car, your monthly house payment is probably larger than your monthly auto payment. After all, the cost of your home exceeds the cost of your car by an order of magnitude. While the resale value of your home may be impressive, it pales in comparison to the total amount that you’ll pay on it over the life of your mortgage. When you borrow hundreds of thousands of dollars to purchase a home, you might not think about the total cost of servicing your mortgage. So, is it better to make extra principal payments or extra mortgage payments?

You should take a moment to do so. If your case is typical, your home will end up costing you nearly twice as much as its closing price. In other words, the interest on your mortgage will make up nearly half of the total cost of your home. Over the 30-year life of your loan, compounding interest will rapidly increase its financial burden. If that seems unfair, you may be able to take matters into your own hands.

Make Extra Principal Payments or Extra Mortgage Payments

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Extra Principal Payments or Extra Mortgage Payments?

Financial experts have developed two related strategies for folks to wish who pay off their mortgages ahead of schedule. Some advocate:

  1. Making extra principal payments on these outstanding loans
  2. Making generalized extra payments at regular intervals

Both strategies are capable of reducing the total cost of a mortgage and may make sense in certain situations.

Many new mortgage-holders find themselves in tight financial situations for several years after the purchase of their new homes. If you’re one of them, you might not be able to afford to make extra payments on your mortgage. However, you may still be able to use your modest reserves of disposable income to make targeted principal payments. In order to do this, you’ll need to contact your mortgage lender and express your interest in doing so.

If you wish to pay down your principal ahead of schedule, your mortgage lender can’t legally stop you from doing so. You’ll need to alert your lender that you’ll be sending a special payment for this explicit purpose. To ensure that your funds are used in the proper manner, you’ll need to mark the check as a “principal-only” payment. To maximize the interest-fighting effects of your extra principal payments, you should make as many of them as possible during the first few years of your loan. This will lower the total value of the balance that remains subject to compounding during the mortgage’s “out years.”

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