How to Pay Down the Principal With a 15 Year Mortgage

by Jay P. Whickson, Demand Media
    Owning your home with no mortgage sounds great but it might not be the best use of your funds.

    Owning your home with no mortgage sounds great but it might not be the best use of your funds.

    If you have a 15-year mortgage, you don't have to wait 15 years in order to own your home "free and clear." Each payment you make contains some money toward interest, the amount the company charges for borrowing and some for principal, the money you borrowed. You can pay the mortgage off earlier by adding extra money toward the principal every month. Since you pay interest on your balance, when you pay extra toward your principal, more of your payment goes toward the principal the next month and less toward interest.

    Step 1

    Decide whether paying off your mortgage is the best use of your money. There are a number of factors to take into consideration. If you have other debt, such as credit card debt, the interest rate is often much higher than that of a mortgage and it's not tax-deductible. Pay that first. Make sure you also have adequate emergency savings. If you find you can't make a mortgage payment on time in the future, no matter how much you paid on the principal, you're payment will still be late.

    Step 2

    Consider your interest rate and calculate your savings on taxes and property taxes to make certain that paying off the mortgage is the best for your finances. Many states offer a mortgage deduction on property taxes. People who pay mortgage interest also get to deduct that amount from their income before they calculate the tax. You need to weigh whether a standard deduction and no interest is better than including interest and itemizing.

    Step 3

    Note whether you have an adequate amount in retirement funds. If you have an extremely low fixed rate, you might be better off investing the funds in a Roth IRA that pays more than your interest and receive tax-free distributions at retirement or a traditional IRA you can tax-deduct. Don't forget to include the saver's credit of up to $1,000 per person for investing in an IRA, when you consider which is best.

    Step 4

    Check with your lender to make certain there's no prepayment penalty. If your results from the mortgage calculator show you'll pay the loan in four and a half years but you have a five-year prepayment penalty, it could cost you money. The prepayment penalties might be interest for a specific number of months on the balance you owe when you make the final payment. Others may be a percentage of the original loan. Calculate it first if you're close to paying off the mortgage to see if the penalty plus the tax savings is worth the interest you save.

    Step 5

    Investigate whether you need to use the amortization schedule or can simply apply any amount toward principal. An amortization schedule shows how much you pay toward principal and how much toward interest every month. Some financial institutions only allow you to make additional principal payments according to the amount on the schedule. Others allow you to make any amount of additional payment.

    Step 6

    Add extra principal payments to each payment if you believe that's your best course of action. Note how much you save in interest by using a mortgage calculator to find your savings. When you make your payment, include the additional amount and note that it's toward the principal.

    About the Author

    Jay P. Whickson worked as an insurance rep, financial planner and stockbroker from 1979 until her retirement in 2007 when she began writing about the field of finance. Whickson has both a Bachelor of Science and a Master of Science in education from Indiana University. She also has post Masters courses in science and a number of different insurance and investment designations and degrees.

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