For many Americans, a mortgage is the largest monthly expense, and likely the longest financial obligation in their future. Most mortgages are built with 30-year terms, meaning paying off the mortgage is a lifelong process. Some questions we get a lot is, “Should I pay extra on my mortgage? Will it help me pay it off faster? Will it lower my monthly payments?”
Today we’re tackling these common questions about paying extra principal on your mortgage to see if it’s the right move for you as a homeowner.
What happens when I pay extra principal on my mortgage?
When you pay extra toward the principal on your mortgage, you’re decreasing the total amount owed on the loan. Paying extra now will not reduce your monthly payment–monthly mortgage installments are fixed. However, paying extra will shorten the amount of time it will take to pay off the loan. For example, paying a couple of hundred dollars extra each month could drop your 30-year mortgage to 25 or fewer years.
Another consequence of paying extra principal on your mortgage is decreasing the amount you’ll pay in interest over the long term. Reducing your principal at an accelerated pace will shorten the amount of time interest accrues, and the total from which interest is calculated.
A final consequence of paying extra principal on your mortgage is that you will gain equity faster. You will “own” more of your home, which will affect your credit and how much you’d get in a sale.
Is it wise to pay extra principal on my mortgage?
The short answer is only for some. Paying extra on your mortgage is a great choice if you plan to stay in your home indefinitely and get the mortgage off your bills at an earlier date. Some homeowners may also consider paying extra on their mortgage to reach a certain threshold of equity in their home. They can pull out for updates or financial collateral in other business deals.
When is it unwise to pay extra principal on my mortgage?
Paying extra on your mortgage only makes sense for permanent homeowners with a specific goal of dropping their mortgage payment early. If you plan to sell your home, paying extra on your mortgage will make a negligible difference in your equity, and that additional money could have more impact elsewhere. You shouldn’t pay extra on your mortgage on a whim to lower your monthly payments. You certainly shouldn’t pay extra principal on your mortgage if you have other debts or at the expense of additional payments and savings.
What should I do instead of paying extra principal on my mortgage?
If you find yourself with more money to put somewhere, there are other places to invest that money for strong financial health. You have several good options that can help minimize your monthly payments and increase your wealth for the future.
Smart financial moves
- Pay off debt – if you have credit card debt or student loans, focusing on eliminating those debts can make a big difference.
- Refinance – if you want to decrease your monthly payment, you may be able to refinance for more favorable terms.
- Invest – investing in the stock market or specialty funds can pay off significantly in the long run, making more than any decrease in mortgage principal.
- Save – it’s never a bad idea to put some money away for a rainy day. Choose a smart high-yield savings account and make regular deposits.