Homeowners who make extra principal payments on their mortgages save money on interest charges and pay off their loans earlier than with the standard repayment schedule. The amount of interest saved depends on the loan amount, interest rate and amount of the extra payments. For example, a homeowner who makes one extra payment a year on a $250,000 mortgage with a 3.4 percent interest rate saves more than $20,000 and repays the loan almost four years early, Discover notes.
When making extra principal payments, homeowners should write a separate check and specify that the money is for principal, Discover advises. Homeowners can check their statements to verify that the money is applied to the principal balance.
Making extra principal payments doesn’t affect the normal monthly payment on a fixed-rate loan. However, homeowners with adjustable-rate mortgages may see their regular payments drop when their mortgages recalculate each year, Discover explains.
Homeowners should consider their complete financial statuses before deciding to pay down a mortgage early, Discover adds. For instance, those who have low fixed mortgage rates may save more money by applying extra funds to higher interest credit cards. Homeowners may also benefit more by investing their extra money into retirement.