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What is an additional principal payment?
An additional principal payment is an extra payment that goes towards the principal portion of a loan. It exceeds the regular monthly payment amount and can help mortgagors pay off their mortgage early and save a little money on interest payments.
When a borrower first takes out a loan, an amortization schedule shows her exactly how much of each monthly payment goes towards interest, and how much goes towards principal. At the beginning of the loan term, the portion of the payment that goes towards the loan’s interest is at its highest. However, as the borrower pays down the loan, the interest portion of the payment regularly decreases.
If a borrower wants to pay off her loan before the maturity date, one of the best ways to do so is to make additional principal payments. Over time, these extra payments will also reduce the amount of interest she pays on the loan. Since the additional principal payment reduces the balance of the loan, this decreases her interest costs for each subsequent payment.
A borrower can make principal-only payments at any time. If she makes them with her regular monthly payment, she may have to specify that the additional amount should go towards the loan’s principal rather than the next month’s loan payment.
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Additional principal payment example
Donna took out a $15,000 loan with an annual interest rate of 10 percent and a term of 36 months. Her regular monthly payment is $484.01. By making an additional $100 principal payment each month, she will pay the loan off six months ahead of schedule. If she makes only the minimum payment, she’ll pay a total of $17,424 including interest. The addition of the monthly principal payment decreases this amount to $16,949.