During the first few years with an amortizing home loan (i.e. principal + interest), homeowners often feel like their entire monthly payment is going towards interest.
Well, not all of it goes towards interest, the graph tells us. Just most of it.
If you’re in the early years of mortgage, though, and want to accelerate your “break-even” date to before Year 18, there are several ways to do it:
- Make a one-time, extra principal payment to your mortgage lender.
- Make monthly principal “pre-payments” to your mortgage lender.
- Remortgage into a lower rate mortgage, paying points if necessary. Pay your monthly “savings” back to your mortgage lender monthly as a principal “pre-payment”.
Each of these options has its own specific math so ask your loan officer for help as it relates to your personal amortization schedule.
However, it’s important to understand that each of these options constitutes its own “mortgage plan” and may not be appropriate for your individual situation. Accelerating principal payback can create huge financial rewards, but it also carries pretty big risks, too.
For example, once you’ve given those extra dollars to the bank, getting them back can be a real challenge.
The bank doesn’t just hand over your the money because you’ve been a model citizen, after all. You have to apply for a new, cash-out home loan just like everybody else. And — in case you haven’t noticed — banks haven’t been too keen on cash-out remortgages these days.
So, there would be two possible outcomes:
- The bank approved your request for a cash-out remortgage and you pay bank fees to get access to your own money
- The bank declines your request for cash-out remortgage and you can’t get access to your money at all
Either outcome can be costly so that’s why you should be sure that a principal repayment strategy is in line with your overall long- and short-term financial goals before sending even $1 more to your lender.
Or, as an alternative strategy, you can also try this: Make extra principal repayments to yourself.
Each month, take the dollars that you were going to send to your lender and put them in a high-yielding savings account instead. Make sure the account is FDIC-insured and then let the interest in that account compound over time.
By keeping the money liquid (but earmarked for your mortgage), you can have cash on hand for an emergency and pay it towards your principal later — if it still makes sense for your plan.
