As a homeowner, it’s common to have questions regarding your mortgage. For example, there is conflicting information out there regarding the benefits of prepaying your mortgage and how it affects your overall payment and home financing; namely prepaying mortgage principal versus just the interest. Your loan officer should be able to help you make an educated, informed decision.
Paying down mortgage principal helps you save on interest
Prepaying your mortgage means paying down your outstanding loan balance, which will reduce the total interest for the life of the loan. The quicker a loan is paid off, the sooner you can stop making monthly payments. Additional principal payments are the best way to pay down your mortgage, save money in interest, and help you build equity faster.
Paying towards interest reduces the amount accrued
Making payments to interest pays off some of the interest you have already accrued. It does not decrease the total duration of your loan term. It also doesn’t help reduce the interest you’ll have to pay in the future.
One way you can save money by prepaying interest is by paying points at the time of your loan closing. In doing so, you’ll decrease your actual interest rate. This reduced rate will affect your overall monthly mortgage payment for the life of the loan.
Tell your lender how additional payments are to be applied
If you send in an additional payment, it will typically go to towards your next month’s payment. Let your lender know that the amount you are paying must be applied towards your mortgage principal, not just the outstanding balance.
The outstanding balance may include interest that also needs to be paid off. Make sure that you tell your lender how to apply your additional payments before you start making monthly payments. This information will help ensure that you don’t mistakenly pay off interest instead of your mortgage principal.
When deciding whether, or how, to pay off your mortgage, look at your entire financial picture and always consult your financial advisor.
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