How to Make Principal-Only Payments on Your Mortgage

When you take a mortgage, it comes with hefty interest payments. The average borrower will pay more than $50,000 in interest alone over the life of their mortgage, and many will pay over $100,000. Making bi-weekly mortgage payments instead of monthly mortgage payments could mean you pay off a 30-year mortgage nearly 2½ years early. These additional payments, called principal-only payments, can help you save more and own your home outright sooner. Read on to understand whether this option could work for you. 

How Does Principal-Only Mortgage Payment Work?

A principal-only mortgage payment is an additional payment made to pay off your mortgage principal faster. Whether you've recently received an inheritance, won the lottery, or got a promotion, paying off your home sooner can be a smart financial move. If your mortgage doesn't have an early repayment penalty or fee, you can pay off your mortgage early and save more. It's a good idea to confirm with your lender that this is an option on your mortgage and then notify your lender if you want to apply extra funds toward your principal, not mortgage interest. 

How to Make a Principal-Only Mortgage Payment

There are different strategies for making principal-only mortgage payments. You could pay a large lump sum, increase payments throughout the year or make an extra payment a few times when your budget allows it.  

Your mortgage loan payment consists of principal, interest, private mortgage insurance and taxes. The amount you pay monthly is divided between principal and interest but not necessarily evenly. Because the interest charged is based on the mortgage principal amount, reducing your principal balance ahead of schedule could reduce the amount of money you'll pay in interest.

During the amortization process, or mortgage repayment, you may initially pay more in interest while gradually paying off the principal. When you make a principal-only payment, you can pay off the loan amount owed more quickly. 

Are you unsure how much interest you're paying? You can ask your lender to review your mortgage amortization schedule, which will show you how much of your monthly payment goes toward the principal and the interest.

Pros

Many financial experts suggest making principal-only payments if you can afford it. Here is an overview of the reasons it's worth prioritizing extra mortgage payments. 

Pay Off the Mortgage Faster

When you make principal-only payments, you can pay off the mortgage faster. A single additional payment each year could shave off over two years of mortgage and interest payments on a 30-year loan. If you're able to make principal-only payments more frequently, how fast you pay off your home is up to you. 

Lower Interest Costs

Principal-only payment lowers your mortgage principal. Since interest rates are calculated based on the principal amount, paying down the principal will reduce interest costs.

Reduce the Loan Balance

Making principal-only mortgage payments reduces loan balances, which can help you build equity in your property faster. Whether you want to get a home equity loan in the future or have greater equity built up when you sell, paying off the mortgage faster will give you extra financial options. 

Cons

While principal-only payments can be a smart financial move for many families, there are a few downsides you should be aware of. 

Limited Availability 

Not all lenders allow principal-only payments. Some will charge early repayment penalties or fees or use the additional payment toward interest and principal, which can reduce or negate any other early repayment benefits. 

Prepayment Penalties

Some lenders impose prepayment penalties for paying off the balance early. This can reduce cost savings and other possible advantages of early mortgage repayments. 

Opportunity Cost

Using extra funds to make principal-only payments means that borrowers can take advantage of other investment opportunities that could provide a higher return. For example, the average annual return of the S&P 500 was 7.7% annually over the last 20 years. 

Other Alternatives to Pay Down Your Mortgage Faster

If you want to pay off your mortgage faster and don't want to make a large principal-only payment. 

Set Up a Bi-Weekly Payment Plan

By setting up bi-weekly payments, you'll pay more each year without needing to gather a larger lump sum. When you make bi-weekly payments, you'll make 26 payments yearly, equivalent to 13 monthly payments. With one extra payment per year, you can pay off your mortgage faster without struggling to come up with a larger payment amount. 

Refinance Your Mortgage to a Lower Interest Rate

If you have improved your credit score or have other options to refinance your mortgage for a lower interest rate, this could lead to substantial monthly savings and help in paying off your mortgage faster. When you refinance, it's a good idea to check with the lender about early repayment penalties or the possibility of making principal-only payments. 

Rent Out a Portion of Your Property

With the rising popularity of Airbnb and competitor sites, more homeowners opt to rent out part of their property. Whether you rent a room, a separate guest apartment or the entire property, choosing to live in a small space and rent the property can bring in extra monthly income. You can use this for principal-only payments or to invest for other savings goals. 

Get the Best Principal-Only Mortgage Payment from Benzinga’s Top Home Loan Lenders

Find Benzinga's top home loan lenders here. 

Are Principal-Only Payments Worth It?

If your mortgage lender allows principal-only payments, making extra payments to your mortgage principal means you can own the home sooner. You can save on interest while building equity faster. While paying off your mortgage early won't work for every family, if it's an option, it can be a smart strategy to pay off the mortgage debt and save more. Want to pay off your mortgage even sooner? Learn how to pay off your mortgage in five years!

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