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How to pay down your principal

Buying a home is an exciting experience. There's nothing like receiving the keys to your home, especially after you’ve worked so hard to save for a down payment and qualify for a loan. But there are many responsibilities that come along with owning a home. At the top of this list is your monthly mortgage payment. 

Like many homeowners, your mortgage payment can be your largest monthly expense. The thought of paying hundreds or thousands of dollars a month for decades can be overwhelming. Paying your mortgage principal faster can reduce the amount of interest you pay and also help you pay your loan off sooner. 

How to ensure your extra payments go towards principal

The key is to specify to your lender that you want your extra payments to be applied to your principal. If you don't make this clear, you may find the extra payment going toward the interest you owe rather than the principal. Regardless of how you make your mortgage payment, here’s how to make sure the extra dollars you contribute go towards principal:

  • Online payments: If you’re set up with online banking, sign in to your account and look for a button or option that allows you to make a payment. Many lenders offer the option to put money toward your principal. Select that option and specify your amount and date.
  • Phone payments: You can call your lender to make an additional payment toward your principal. Have your account information ready. Most importantly, tell the person you’re speaking with that you want to apply your additional payment to your principal. Make sure to receive confirmation.
  • In-person payments: If you feel more comfortable making your payment in person, or if you would like to learn more about additional principal payments, it's a good idea to visit your local branch. Make sure you have a check, cash or your bank account information on hand so they can set up your payment. And don't forget to remind them you want your payment applied to principal.
  • Regular Mail: Your paper statement typically will include a line item for where you want your excess payment to be applied to.

Why pay down your mortgage faster?

During the first several years of your loan, the bulk of your mortgage payment goes toward interest. The portion of your payment devoted to the principal, on the other hand, may seem surprisingly small. Here are some of the benefits of reducing your principal and paying off your mortgage early:

You can devote cash to other things

Once you make your final mortgage payment, your cash flow immediately improves. You can begin funneling the money you were putting toward your mortgage to other things. For example, you can pay off other debts, contribute more to retirement or invest the money.

Safeguard your homeownership

Recessions, pandemics and job loss all have the potential to cause people to fall behind on monthly payments. While homeownership is certainly not a magical solution, paying your mortgage off early eliminates a large expense that you would otherwise face during a crisis.

Access the equity in your home

Once your home loan has sufficient equity or is paid in full, you may be able to tap into your home's equity. Whether you need to add a mother-in-law suite to accommodate an aging parent or cover some unexpected medical expenses, your chances of being approved for a home equity line of credit (HELOC) can improve when you have sufficient equity or own your home.

Enjoy peace of mind

For many people, the feeling of accomplishment that comes after your payoff is second to none. But paying off a mortgage early also gives you peace of mind. Without the ongoing monthly mortgage payment, you’re a big step closer to financial freedom.

Save on interest

The amount of interest you pay each month is calculated using your principal balance. As your principal balance decreases, your interest goes down as well. You could potentially save thousands of dollars in interest over the life of your loan by paying down your principal faster.

Drawbacks to paying down your principal early

Paying down principal requires discipline and dedication for long-term benefits. You’re using money you could spend on alternatives, like a vacation or a nicer car or could be earning interest if invested elsewhere. Putting extra money toward your mortgage can also hinder your ability to pay off debts with higher interest rates. And if you lack an emergency fund, you should think twice before you put an unexpected cash infusion toward your mortgage. Finally, some lenders may charge fees for additional payments or early payoff. Make sure you ask about any extra fees.

Ways to pay down your mortgage principal faster

1. Make one extra payment every year

Making just one extra payment towards the principal of your mortgage a year can help take years off the life of your loan. This method reduces the total amount of interest you pay, while helping you fast-track your mortgage payoff. Making one extra payment towards principal every year is a good option for homeowners who usually receive one or more of the following:

  • A year-end or lump-sum bonus from an employer
  • A yearly tax refund
  • An annual monetary gift from a family member or loved one

2. Make monthly recurring payments toward your principal 

Making a large payment can be a bit intimidating to some people. However, you can achieve similar benefits by making small monthly principal payments on a recurring basis. Over the period of a year, small monthly payments can add up to a large annual amount. 

This strategy works well for people who have a dependable second source of income such as a part-time job or monthly income from a rental property.

3. Split your monthly mortgage payment in half and pay that amount every two weeks

Another popular way to pay principal down faster is to pay your lender half your monthly payment amount every two weeks. This results in you paying an additional month's worth of payments over the course of a year. For example, rather than making 12 payments of $2,000 for a yearly total of $24,000, you would make 26 total payments of $1,000 for a total of $26,000.

This strategy is a good choice if your employer pays you every two weeks instead of once or twice per month. Here's how it works: 

  • Divide your monthly mortgage payment in half to see how much you’ll pay every two weeks.
  • Work with your lender to set up automatic flexible payments from your account.
  • Two months per year, you’ll make an extra half payment. Those payments are applied to your principal.

4. Round up your monthly payments to the next $100 and pay the difference

Mortgage payments rarely end in an even multiple of $100 and zero cents. By rounding up to the next $100 and putting the difference towards principal, you’ll end up paying less in interest. For instance, if your current payment is $1,527 per month, you can pay $1,600 per month. By the end of the year, you’ll have paid $876 extra toward your principal. 

5. Use a combination of methods

Today's lenders make it easy for homeowners to use a variety of methods to pay down their principal faster. You’re not limited to using only one of the methods above. If your income or expenses tend to fluctuate, you can make extra payments whenever you’re able. 

How can I find the best mortgage payment schedule for me?

If you’re eager to find a way to pay off your mortgage faster, talk to a Home Lending Advisor. Whether you're an existing homeowner who wants to pay down your principal faster, or you’re planning to buy your first home, we’re here to help.

There are many ways to pay off your principal faster. A qualified Home Lending Advisor can help you understand the pros and cons of each strategy so you can choose the option that best meets your needs.

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