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Congratulations on buying an Inland Empire home. Now that you’ve settled in, let’s talk terms. When you signed your mortgage loan papers, your lender provided you with a breakdown of your monthly payment. It includes your principal and interest. At the beginning of your loan, most of your payment goes towards your interest with little going towards your principal. But many lenders allow you to make extra payments that help you pay down your principal faster. These are called “principal-only payments” and will save you tens of thousands of dollars in interest over the life of your loan.
Principal-Only Payments
As the name suggests, these payments get directly applied to your principal (the amount of the loan you took out). You still need to make your regular monthly payment. For principal-only payments, contact your lender first. They usually want you to make a completely separate payment that you designate to be applied only to your principal. Sometimes, if you do not make this distinction, your extra payment may just be applied to the next month’s payment (which goes to the principal and interest instead of just the principal). That defeats the whole purpose of making that extra payment.
How Does This Help?
When you take out a mortgage loan, it starts up the amortization process. This determines how much of each payment gets applied to the principal and how much goes to interest. The interest applied is determined by your principal. So, if you reduce your principal, you reduce the amount of interest applied. Plus, reducing your principal ahead of schedule also gets your loan paid off faster. Additionally, it helps increase your equity.
Weighing the Pros and Cons
Saving tons of money in interest. Paying off your Inland Empire home faster. Getting to use that money to pay off other debts or invest it. All of that sounds fantastic, right? It is! But you need to know the possible downsides of principal-only payments as well.
Some lenders charge a significant pre-payment penalty. Also, some lenders charge a fee to process extra payments. Check your paperwork or ask your lender about this before making any extra payments. Finally, that money you set aside for paying down your mortgage loan cannot be used for anything else…like paying off other debt right now. Instead, you must wait until later to have the extra cash to pay off your current debt. Weigh these pros and cons carefully before you decide to make any additional payments. You do not want to put yourself in a worse financial situation because of it.
Muna Dionne, your Inland Empire specialist with Coldwell Banker Realty
