Extra principal payment
Updated
What is extra principal payment?
An extra principal payment is money paid above the required amount and applied directly to the balance. It shortens the loan and cuts total interest, but does not lower the required monthly payment.
Extra principal payment questions
- What does paying extra principal do?
- It reduces the balance immediately, so every month afterwards is charged interest on a smaller number. The payment stays the same, so the loan reaches zero sooner and costs less in total.
- Do extra mortgage payments go towards the principal?
- Only if you say so. Lenders often apply an unmarked extra amount to the next payment rather than to principal, which delays your due date instead of shrinking the balance. It normally has to be designated as a principal-only payment.
- What is the effect of paying extra principal on a mortgage?
- Interest saved and a shorter loan, and the effect compounds: money paid early avoids interest for every remaining month, so the same amount is worth far more in year two than in year twenty.
What it means in practice
Every extra dollar of principal eliminates all future interest that dollar would have accrued, which is why extra payments are most powerful in the early years.
Confirm with your servicer that extra amounts are applied to principal rather than held as a prepaid future payment.
If lowering the required payment is the goal, you need a recast rather than extra payments. The two are frequently confused.