How to Cut Mortgage Principal

Shorten the term of your mortgage loan by paying extra principal each month.
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The best way to pay off a mortgage faster is to make additional payments on the principal, according to Don Taylor, Ph.D., certified financial planner and Bankrate advisor. Accelerating your mortgage by making extra payments on the principal can save you thousands of dollars in interest over the lifetime of the loan. Another plus: by paying off your mortgage early, you do away with a major housing expense and reduce your cost of living.

Step 1

Take a look at your household income and expenses. If you don’t have a budget already, now is the time to plan one. Determine how much extra money you can apply to your mortgage each month or how many additional payments you can make. Just one extra payment a year can help reduce your mortgage principal faster, which also reduces the total interest you owe.

Step 2

Read over your mortgage documents carefully. Check to see if there is a penalty for mortgage prepayments. In most cases, there is no penalty charged if you have a fixed-rate mortgage. Some lenders will charge a penalty for prepayment on loans with variable interest rates. If there is a penalty, decide if the benefits of paying off your mortgage sooner outweigh the penalty you will have to pay.

Step 3

Determine how you will apply extra payments to your principal. One option is to make an extra payment or two throughout the course of the year. You can also opt to pay more than the amount due for your mortgage payment each month. Use a free online prepayment calculator to help you determine how much your mortgage principal will decrease as you make extra payments (see Resources).

Step 4

Apply any extra money you pay on your mortgage to the principal and not the interest. Many mortgage payment slips offer a box where you can state that “X” amount of dollars is to be applied toward the principal. Use this box if it is provided. If not, submit two separate checks. Submit one check for your regular mortgage payment and the other for the extra amount you want applied toward your principal. Make a notation on the second check that the amount is to go on the principal balance only.

Step 5

Contact the lender after sufficient time has passed for the extra payment to be received and processed. Verify that the additional payment has been applied directly to the balance of your mortgage principal. You can also ask for the amount of principal remaining on your mortgage both before and after you make the payment to ensure that the money is credited properly.

Step 6

Set up bi-weekly mortgage payments. Making your mortgage payments every two weeks instead of once a month allows you to make an additional payment each year that can be applied to the principal. This option is not for everyone as it depends on the amount of other bills you have, as well as how often you get paid each month.

Step 7

Ask your mortgage lender to increase your payment by 1/12th, but you do the calculations first to determine if you can afford the additional amount each month. This may be a practical option if you are in a position to afford to pay extra on your mortgage but are afraid that you don’t have enough discipline to do it on your own.

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