Can You Pay Principal Only on a Mortgage?

A mortgage is a long-term loan for purchasing a home, with the property serving as collateral. A typical mortgage payment combines principal, interest, and often amounts for property taxes and homeowners insurance. Understanding these components is important for managing this financial commitment.

Understanding Mortgage Payment Components

A standard mortgage payment consists of two elements: principal and interest. The principal portion directly reduces the outstanding loan balance. Interest is the cost charged by the lender for using the borrowed funds, calculated as a percentage of the remaining principal balance.

Mortgages are repaid through a process called amortization, where scheduled payments gradually pay off the loan over a set period, commonly 15 or 30 years. In the initial years of a mortgage, a larger portion of each payment is allocated to interest, while a smaller amount goes towards reducing the principal. As the loan matures and the principal balance decreases, this proportion shifts, with more of each payment applied to the principal and less to interest.

Many mortgage payments also include amounts for property taxes and homeowners insurance, often held in an escrow account. These funds are collected monthly and disbursed when the respective bills are due. This arrangement helps ensure these recurring property expenses are covered consistently.

Making Additional Principal Payments

While a regular monthly mortgage payment includes principal, interest, and sometimes escrow, borrowers can make additional payments designated for principal. This strategy allows homeowners to accelerate their loan balance reduction beyond the standard amortization schedule. It is important to indicate that any extra funds are to be applied to principal only, rather than being held as a credit or applied to future interest payments. If not specified, additional funds might be applied to the next month’s payment, covering both principal and interest, which still helps but is less impactful than direct principal reduction.

Borrowers can make extra principal payments through several methods:
Many lenders offer online portals where borrowers can specify how additional payments should be applied.
Mailing a separate check to the mortgage servicer with explicit instructions, such as writing “for principal only” in the memo line.
Making bi-weekly payments, which results in 26 half-payments annually, effectively adding one extra full payment toward principal each year.
Contacting the lender directly by phone or in person to ensure the extra payment is correctly applied.

Financial Impact of Extra Principal Payments

Consistently making additional principal payments can have a significant financial impact for homeowners. A primary benefit is the reduction in the total amount of interest paid over the life of the loan. Since interest is calculated on the remaining principal balance, reducing that balance sooner means less interest accrues over time. This can lead to savings of thousands of dollars in interest charges.

Another advantage is the ability to shorten the overall loan term, allowing the borrower to pay off the mortgage sooner than originally scheduled. Even small, consistent extra payments, such as an additional $50 or $100 per month, can shave years off a 30-year mortgage. For example, an extra $100 per month on a $200,000, 4% interest, 30-year mortgage could shorten the loan term by over 4.5 years and save more than $26,500 in interest.

Accelerating principal payments also builds equity in the home at a faster rate. Equity represents the portion of the property that the homeowner owns, calculated as the home’s value minus the outstanding mortgage balance. Increased equity provides a greater financial cushion and can be beneficial if there is a need to refinance or to access home equity loans or lines of credit in the future.

Important Considerations for Extra Payments

Before making extra principal payments, homeowners should consider several factors to ensure this strategy aligns with their overall financial situation. It is important to verify that the additional payment has been correctly applied to the principal balance by checking statements or contacting the lender. This step confirms the payment is reducing the loan balance and not just prepaying future scheduled payments.

Additional principal payments do not impact the required amounts for escrow accounts, which cover property taxes and homeowners insurance. These payments must still be made as part of the regular monthly mortgage obligation, as they are separate from the principal and interest components. The extra principal simply reduces the loan balance, not the obligations for taxes or insurance.

While rare for most conventional residential mortgages, some older or specific loan types might include prepayment penalties. A prepayment penalty is a fee charged by lenders if a significant portion or the entire mortgage is paid off early. Borrowers should review their loan documents or consult their lender to determine if any such penalties apply to their specific mortgage.

Finally, it is prudent to assess other financial priorities before paying down a low-interest mortgage. This includes maintaining an adequate emergency fund, paying off higher-interest debts like credit card balances, or contributing to retirement savings. Balancing mortgage payoff with other financial goals ensures a comprehensive and stable financial plan.