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Understanding Principal-Only Payments: Benefits and Drawbacks

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Understanding Principal-Only Payments: Save Money and Pay Off Your Mortgage Faster

Understanding Principal-Only Payments: Save Money and Pay Off Your Mortgage Faster

What Is a Principal-Only Payment?

A principal-only payment is an additional payment made on a loan that goes directly towards reducing the principal balance. The principal is the original amount borrowed, which accrues interest over time. By making principal-only payments, you can pay off your loan faster and save money on interest.

Pros and Cons of Principal-Only Payments

Pros

  • Pay less interest overall: Reducing the principal balance results in less interest accruing over the loan’s lifetime, saving you money.
  • Pay off the loan sooner: By paying down the principal, you can potentially pay off your loan early.
  • Flexible payment amounts: You can make principal-only payments whenever you have extra funds, without committing to a fixed additional amount each month.

Cons

  • Monthly payments remain the same: Your required monthly payment will not decrease, even if you make large principal-only payments.
  • Reduced available cash: Extra payments reduce your available cash, which could be used for other debts or opportunities.
  • Potential lack of benefits: Some loans have precomputed interest or prepayment penalties, which may negate the benefits of principal-only payments.

Is It Better to Pay Principal or Interest?

Standard loan payments typically cover accrued interest and fees first, with any remaining funds applied to the principal. While you often don’t have a choice in this matter, paying down the principal is the ultimate goal. If you make extra payments, instruct your lender to apply them to the principal balance.

Additionally, if you’ve significantly reduced your loan balance, you might consider recasting your loan. Recasting adjusts your monthly payment based on the current principal balance, potentially lowering your payment without the need for a new loan application.

Example: The Impact of Principal-Only Payments

Consider a $400,000 mortgage with a 6% interest rate and $2,398.20 monthly payments. By making an extra $200 monthly principal-only payment for three years, you can save $1,220 in interest and reduce your remaining mortgage balance by $10,820.

Payment Period No Extra Payments (Principal / Interest) With Extra $200 Payments (Principal / Interest)
First Payment $398 / $2,000 $598 / $2,000
12th Payment $421 / $1,978 $632 / $1,967
24th Payment $447 / $1,952 $671 / $1,927
36th Payment $474 / $1,924 $712 / $1,886

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we understand the importance of managing your mortgage effectively. Our team of experts is here to help you navigate your mortgage options and make informed decisions. Whether you’re considering principal-only payments or looking to refinance, we can provide the guidance you need.

Call us today at 213-732-3074 for personalized mortgage services and start saving money on your loan.



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