Additional Principal Payment
Definition and meaning of Additional Principal Payment in real estate.
An additional principal payment is an extra payment made by a borrower directly toward the outstanding balance of a loan, separate from the scheduled interest and principal amounts. This payment reduces the total debt owed, rather than prepaying future scheduled payments.
In more detail
Making additional principal payments helps borrowers save money on interest over the life of the loan. Because interest is calculated based on the remaining principal balance, a lower balance results in less interest accruing. This strategy also shortens the overall loan term, allowing homeowners to pay off their mortgages years ahead of schedule.
Borrowers can make these payments as a lump sum or by adding a set amount to their monthly mortgage payment. It is important to verify that the mortgage lender does not charge a prepayment penalty for making these extra payments.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Primary benefit | Reduces interest and loan term |
| Frequency | Typically flexible and optional |
| Watch out for | Prepayment penalty clauses |
A homeowner adds an extra amount to their monthly mortgage payment, specifying that the extra funds should go directly to the principal balance, which reduces their overall loan term.
Frequently asked questions
How do I make sure my extra payment goes to the principal?
You should explicitly instruct your lender, either online or on the payment coupon, to apply the extra funds to the principal balance rather than the next month's scheduled payment.
Can additional principal payments lower my monthly payments?
Typically, they do not lower the monthly payment amount but instead shorten the length of the loan. To lower payments, you would need to refinance or request a loan recast.