When Your Mortgage Payment Starts to Mean Progress

Have you ever really looked at your amortization schedule? Do you know how each payment breaks down? How much of your payment every month goes to principal, interest, taxes, and insurance (PITI)? When you look at your payoff amount, it never seems to get any lower. There's a reason for that.

Your payment (X) looks like this:

X = Principal + Interest + Taxes + Insurance

Amortization is the way your loan decreases over time. You can usually go to your lender's website and view an amortization table for your loan. The table shows how much of each payment goes towards interest and principal (and taxes and insurance) each month. If you look at all the numbers, you'll see how those amounts change. Though your monthly payment remains the same, more of it goes towards interest at the beginning of your term, and less towards principal. Each month, the portion of your payment that goes towards interest decreases, while the principal payment increases; the payment looks the same, but the proportion is different.

As you pay more of the principal balance, your payoff amount decreases, and the equity you have in your home increases. And if you pay a little extra here and there? That goes towards reducing your principal, which could reduce the amount of interest you ultimately pay, as well as the time it will take to pay off the loan. Doesn't that sound like fun? There are a few smart ways to make extra payments towards principal:

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  1. Windfall! Let's say you get a bonus at work or, sadly, a relative dies and leaves you some money. Instead of frittering it away, put it towards something big, like a payment on the principal of your mortgage. Just make sure to talk to your lender first and read your paperwork to find out if there are early payment penalties.
  2. Round up. If your mortgage payment is $879, it shouldn't be that much harder to pay $1,000 every month. At the very least, consider rounding up to $900, a $21 difference, the cost of a good lunch in a restaurant.
  3. Make biweekly payments. Some borrowers pay twice a month, each payment equal to exactly half of what a monthly payment would be. Instead of twelve full payments, this schedule means they'll pay 26 half payments, or 13 full payments, a full extra payment each year.

You could also do all three of those! Building equity in your home gives you a valuable asset. More equity means you'll have more funds available in a home equity loan, which can be used to remodel or add on to your home, increasing its value, or for any expense, you have, from using your home to pay for retirement to your child's college tuition. Throughout the life of your loan, keep an eye on that amortization table, and on your payoff amount. If you pay down the principal, that payoff amount will get lower and lower, and that's exciting.