How to Reduce the Principal on a Mortgage

by Jay P. Whickson, Demand Media
    Paying your mortgage early saves thousands of dollars in interest.

    Paying your mortgage early saves thousands of dollars in interest.

    The best ways to reduce your mortgage principal rapidly all involve paying additional principal amounts. Early in your mortgage, principal amounts are typically quite small, and a payment containing a few extra dollars makes a huge difference over the life of the mortgage. Later in the mortgage, when the principal payment meets or exceeds the interest payment, the amount for a principal payment is substantially higher. Some financial institutions allow you to vary from the amortization schedule, which shows the amount of each payment going to principal or interest.

    Step 1

    Request an amortization schedule at closing. Most mortgage lenders either have them available or can help you create one using the interest rate, principal and number of payments. If they can't, you can create your own using a spreadsheet or an online template.

    Step 2

    Ask your mortgage lender if you can make principal payments that don't follow the amortization schedule. Some lenders allow you to pay more than the scheduled principal payment. If your lender doesn't allow varied payments, you must stick to paying the principal payments shown on the amortization schedule. You can pay several principal payments at once quite easily in the early years of the mortgage when the principal payment is small.

    Step 3

    Pay the extra amount but don't expect it to give you relief from your next payment. No matter how much you pay against the principal, you still must make another payment. If you want to pay a few payments ahead, you have to specify that you want the entire amount as an additional monthly payment, not a principal payment, or you'll receive a late fee if you skip a payment.

    Step 4

    Change your payment to a biweekly payment schedule. If you opt for a biweekly payment option, you'll be paying an additional month every year, which reduces the mortgage rapidly. Confirm with your lender that there's no cost to you to change to this type of payment. If there is, simply do it yourself by tucking away a portion of the payment every two weeks. At the end of the year, apply the extra payment saved toward your principal.

    Step 5

    Reduce the principal amount with a large, lump-sum payment. A company bonus or a financial gift from a relative can make a big impact on the principal balance.

    Tip

    • Consider the interest rate and any tax benefits before you pay off your mortgage early. If you have a low interest rate, the money might serve you better in a high-yield investment, or you might receive more tax benefits by using the interest deduction and putting the extra payment toward a retirement plan.

    Warning

    • Be aware that some mortgages contain prepayment penalties. If you pay off the mortgage too soon, you might incur a penalty.

    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.

    Photo Credits

    • Andrew Bret Wallis/Photodisc/Getty Images