Guide

What Is The Loan Principal In A Mortgage?

How can I pay off my boss faster?

You usually pay off the principal fairly slowly, as you have to take care of a large portion of the interest before your payments start to have an effect on your loan balance. But what if you want to pay off principal faster? Paying off your loan more quickly can help you build capital and shorten the term of the loan, allowing you to build wealth and save on interest paid throughout the life of the loan.

So, how do you do that? Let’s talk about some of the ways you can work towards paying off your mortgage early.

Bi-monthly payments

Regardless of the size of your loan, your monthly mortgage payment will likely be a bit overwhelming. The principal, interest, taxes, and insurance all at once can pay a huge bill every month. One solution to make those payments easier (as well as help you pay more faster) is to make your mortgage payments every two weeks instead of making monthly payments.

If you normally pay $1,500 per month, switching to a bi-monthly schedule means you’ll pay $750 every two weeks instead. Splitting payments can help make your budget more manageable, week after week — and switching to a bi-monthly schedule also means you’ll end up paying a little more than you would if you were making monthly payments.

Within a year, you’ll make 12 payments overall in a monthly schedule. If you add up all the half payments you’ll be making on a bimonthly schedule, you’ll actually end up paying the equivalent of 13 full payments instead of 12 — which may not seem like much more, but you can actually take years out of the life of your loan.

Mortgage Rework

When you make a large down payment at closing, you reduce the amount you will end up paying monthly for the life of the loan.. What if you could do the same later in the loan term?

You can do exactly that by reformulating a mortgage – also called a mortgage rework. Mortgage reformatting allows you to pay a lump sum of the principal balance of your loan, reducing the cost of your monthly payments in the future.

Not everyone will be able to do this — the FHA, Virginia Cells, the USDA and most massive loans don’t qualify for mortgage rework. Lenders will also have their own requirements about how much and when you can contribute.

However, if this is an option for you, and you have some money saved up to put into the loan, it can help you significantly reduce the amount you still need to pay in your balance.

Make additional payments

An extra payment made when you pay twice a week instead of monthly can help you pay off your mortgage faster – so it’s only natural that extra payments pile up on that. Some homeowners may choose to pay off one and a half months’ worth of money instead of the usual payment, which can help speed up the time to pay off their loan significantly.

If you can commit to making additional payments, this will reduce the amount of interest you will pay over time, since you will reduce the principal at an increasing rate.

For example, let’s say you take out a 30-year fixed-rate loan of $175,000 at 4% interest to purchase a home. Over the life of the loan, you can expect to pay $125,771.64 in interest. This is roughly the size of the principal balance of the loan itself!

If you pay an extra $100 each month on your mortgage payments, you can reduce that interest amount to a manageable $99,650.33. That’s $2,6121.31 in total savings – a huge amount.

Refinance your 30-year term into a 15-year mortgage

For those who are dedicated to achieving financial independence and paying off their loans as soon as possible, refinancing your mortgage in the short term is another way to pay off principal faster — although it will mean higher monthly payments.

If you refinance a 30-year loan for a 15-year loan, you can pay off the principal in half the time — but your payments will be significantly higher each month. If you can swing financially, this is a great way to make your home payments early and take the stress of monthly mortgage payments out of the way for good.

It will save you a lot of interest by going for a shorter period, but refinancing also comes with a lot of costs. Expect much higher monthly payments as well as various costs associated with refinancing, such as application fees, appraisal fees, property search fees, etc.

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