How to Pay Principal Only on Your Mortgage

A mortgage is a loan used to purchase real estate. Your monthly payment typically consists of principal and interest. Principal is the original amount borrowed, and interest is the cost charged for borrowing. Focusing on principal-only payments directly reduces the outstanding loan balance, leading to substantial long-term benefits.

Understanding Principal-Only Payments

The principal is the actual amount of money you borrowed for your home, representing the debt you must repay. Interest, in contrast, is the fee the lender charges for providing the loan, calculated as a percentage of the outstanding principal balance. For example, if you borrowed $300,000 and made a $30,000 down payment, your initial principal would be $270,000.

Mortgages are repaid through a process called amortization, where each regular payment is split between principal and interest. In the early years of a typical mortgage, a larger portion of your monthly payment is allocated to interest, with a smaller amount going towards reducing the principal balance. As the loan matures, this allocation gradually shifts, with more of each payment going towards principal. Making extra principal payments directly accelerates this process, reducing the loan balance faster than the standard amortization schedule. This action lowers the amount on which interest is calculated, ultimately decreasing the total interest paid over the life of the loan and shortening the loan term.

Methods for Making Extra Principal Payments

Making principal-only payments requires clear communication with your mortgage servicer to ensure funds are applied correctly.

Online Portal

Many lenders offer a dedicated option or checkbox to designate extra funds specifically for principal, often labeled “principal only” or “additional principal.” You will typically navigate to the payment section and select this option before submitting the extra amount.

Mail-In Payments

For those who prefer traditional methods, mail-in payments are an option. When sending a check, clearly write “for principal only” in the memo line or include a separate note explicitly stating this instruction. Sending the payment to the servicer’s designated payment processing address helps ensure it reaches the correct department. This clear designation prevents the extra funds from being applied to future interest, escrow, or simply as an early payment for the next month’s full installment.

Phone Contact

Another way to make principal-only payments is by contacting your mortgage servicer directly via phone. When speaking with a customer service representative, you must clearly state that you wish for the additional funds to be applied solely to the principal balance of your loan. It is advisable to request confirmation that your instructions have been noted and that the payment will be allocated as specified. You should have your account information readily available to expedite the process.

Recurring Payments

Some servicers also offer the convenience of setting up recurring principal-only payments. This feature allows you to automate additional contributions towards your principal balance on a regular basis, such as monthly or quarterly. If this option is available, you can often set it up through your online account or by speaking with a customer service representative. This systematic approach ensures consistent progress in reducing your loan balance without requiring manual intervention each time.

Key Considerations Before Paying Extra Principal

Before making extra principal payments, it is important to review your loan documents for any potential prepayment penalties. While the Dodd-Frank Act of 2010 limited these penalties for many loans originated after 2014, some conventional or non-conforming mortgages might still include them. These fees are typically calculated as a percentage of the remaining loan amount, often 1% to 2%, or a certain number of months’ interest, and usually apply only if the loan is paid off entirely within the first few years, commonly three years. Understanding these terms helps avoid unexpected costs.

It is essential to verify that any extra payments are indeed applied to your principal balance and not to future interest or into an escrow account. After making an extra payment, check your mortgage statements or contact your servicer to confirm the correct application of funds. If the payment is not explicitly designated for principal, some lenders may apply it towards your next standard payment, which includes both principal and interest, or hold it as an unapplied fund.

If your mortgage includes an escrow account for property taxes and homeowner’s insurance, understand that extra principal payments do not impact this account. Funds in an escrow account are specifically held to cover these property-related expenses when they become due. Overpaying into escrow will result in a surplus that may be refunded or credited, but it will not accelerate your mortgage payoff.

While reducing mortgage principal is often beneficial, consider other financial priorities before committing all extra funds. High-interest debts, such as credit card balances, typically carry interest rates significantly higher than mortgage rates, making them a more pressing concern for repayment. Additionally, maintaining an adequate emergency savings fund, typically three to six months of living expenses, is a prudent financial practice. Ensuring these areas are addressed provides a stronger financial foundation before focusing entirely on an accelerated mortgage payoff.