Paying additional principal mortgage is a strategy that is used by investors in order to create a better return on their investment and increase their wealth. This can be particularly beneficial for older investors who may have accumulated secondary homes. The additional principal mortgage allows the investor to sell their home which will then be replaced with a new property that can generate higher returns, and then the funds from the sale of the original property is used to pay back the difference in interest rate between both mortgages. This can facilitate a significant jump in return on investment for older investors and help them live comfortably into old age.
To see if this strategy might benefit your situation, you should first assess your cashflows and decide if it would improve your return in an acceptable amount of time. If your cashflows would be better off with a higher return, then the additional principal mortgage is the best strategy for you. You should also look at how much equity you have in your current home and how much equity you want to start building in your new home. If you aren’t comfortable with the amount of equity, then this strategy will not work for you.
Set up a new account just like a regular mortgage. The only difference being that the extra principal is paid each month as opposed to payments being made at the same time as regular mortgage payments. You can create an additional account by simply creating a second mortgage and linking both together, or paying extra principal monthly with separate accounts.
Is it worth paying extra principal on mortgage?
This strategy can offer a huge amount of benefit, however the amount of return may not be significant to some people. The reason for this is that the amount of money you have left in your investment account each month can be influenced by a number of factors. For example, if you have more cashflow then you need to pay off debt quicker, or if you have more income than other expenses, then the extra principal won’t be as beneficial as you would think.
To find out if this strategy might benefit your situation, you should first assess your cashflows and decide if it would improve your return in an acceptable amount of time. If your cashflows would be better off with a higher return, then the additional principal mortgage is the best strategy for you. You should also look at how much equity you have in your current home and how much equity you want to start building in your new home. If you aren’t comfortable with the amount of equity, then this strategy will not work for you.
Once each month, use an online mortgage calculator to calculate how much extra principal would need to be paid in order to meet both interest and principal payments each month. Once this is calculated out, there will be a difference in the monthly payment that must be made each month for both the existing mortgage and new one (the additional principal account).
What does an additional principal payment do?
An additional principal payment is added to the payment for the primary account each month. This means that you are paying extra interest and principal each month, which will help you pay off your mortgage faster, and therefore get out of debt quicker.
How long does it take to pay down an additional principal mortgage?
The amount of time it takes to payoff a second mortgage or additional principal account depends on different factors. The longer you have the home and pay extra, the faster you will pay off your mortgage. The amount of time it takes will also depend on how much extra principal you decide to add each month, and how much money is already paid into your account through other sources (i.e. rental income).
Once the additional principal is paid off, the extra principal account will have less money in it. So, the amount of time before it’s paid off will speed up.
However, if you have less than a 20% down payment on your new property, then your second mortgage may still be included in the amount you need to pay back each month. If this is the case, then subtract 20% from the total monthly payment that you need to make to see how long it will take to pay it back.
For example, let’s say you have a $100,000 mortgage and $20,000 extra principal added each month for 20 years.
How do I pay additional principal on my mortgage?
In order to pay additional principal on your mortgage, you should first find out the current interest rate for the primary and secondary mortgage. The extra principal account should then be paid a certain percentage more than the current interest rate of the primary mortgage. If you pay $50 more per month on a $100,000 second mortgage, then it will take you 20 years to pay it off.
What is the tax effect of additional principal payments?
Most mortgages are considered tax deductible which means that if you have a second account at say 4%, and make monthly payments of $500 each month to that account, then your taxable income will not be affected because those payments are tax deductible. However, if the primary mortgage has a higher interest rate than the extra principal payment, then those payments will affect your taxable income. For example, if the primary rate is 3% and extra principal is 4.5%, then your taxable income will go up by $40 per month because on average you are paying $40 more each year than you were before paying off your second mortgage.
Consider using this strategy:
- If you have enough money to pay cash for a new home in addition to an additional principal account, then pay cash up front.
What happens if I pay an extra $200 a month on my mortgage?
First, the extra principal payment will increase your payments each month for 20 years by $200. This means you will pay a total of $30,000 upfront cost to pay off your mortgage. The additional interest that you’re paying each month on the second account (if you have one) is an additional monthly cost of $250. Because both accounts are paying interest every month, they will eventually pay off together and disappear.
The total amount of money you will have left in your investment account depends on a number of factors such as:
- How much equity do you have in your first home?
- What do you earn each month?
- When will you sell your current home?
Consider using this strategy:
- If you are buying a new home with no cash and have some extra time before the new house is paid off, consider paying extra principal on your existing mortgage.
- If after twenty years it’s still not enough, use a strategic withdrawal plan to pay down both mortgages faster.
Also, consider using this strategy if you have enough equity in your first home but you still need to pay off a second mortgage. If for example, you have a $400,000 house with $200,000 of equity and a second mortgage on the house worth $100,000, then consider paying additional principal on the secondary mortgage because it will be paid off 100% faster than the first one.
To sum up
As a new home buyer, you need to know the impact of all of your payments. But it is critical to understand the extra principal account. When you consider paying extra principal on your mortgage, remember that interest and principal payments will increase for a period of time. Then after the first one or two years, the extra principal account effectively disappears. And, you can pay more interest and less principal on your primary account.
Interest+Principal payment(s) = Mortgage payments
Interest payment + Principal payment(s) = Mortgage payments
By Paying Extra Principal each month on Your Mortgage you are increasing both Payments.
FAQs about paying additional principal mortgage:
- What is paying additional principal mortgage?
Extra principal refers to the money that you pay each month on your mortgage in addition to the original principal. The extra principal is added to the mortgage monthly and it’s paid off after 20 years.
- Can I pay extra principal on my mortgage if I’m a first-time home buyer?
If you are buying your first home, then yes, it’s perfectly ok to pay extra principal. Extra principal is not a tax deduction, it’s an expense. However, the extra principal payment will increase your total mortgage payments by $200 per month. Therefore, consider this when paying off your second mortgage.
- What happens to extra principal if I decide to renew my existing mortgage?
This is a common question. And it depends on the amount of extra principle you have added to your already existing mortgage. If you have added more money as an additional principal account, you will continue that money to pay on with monthly payments.