When you buy a property, you agree to make a fixed payment for a determined amount of years as stipulated on the closing table. However there is a possibility of making payments to the principal balance. If you are not eligible for refinancing or are not in a position to do so, making payments to the principal balance is an effective alternative to reduce the number of years of your loan.
To start with this amortization practice you must first learn some important details, because it’s not always as easy as walking into the bank and pay an amount greater than the fixed payment which you must pay month after month. Here we point out some of the details you must have in mind:
- If you have decided to make an additional payment to the principal balance, the first thing you must do is go to the bank that has your mortgage and talk to a specialist to verify if an amortization is allowed for your type of loan.
- If it’s allowed, you must use the amortization table that the bank provides you to verify how much your interest can be reduced and how much you will save when the loan is paid off. It’s important that you understand that this doesn’t mean that the amount agreed for the monthly payment at the time of the mortgage closing will change; that amount will remain the same until you pay off your mortgage. With an amortization, you can reduce the loan term and it will depend on the amount that you pay on the principal balance.
- In that orientation you could define the amount that you wish to pay to the principal balance, but you must make the payment month after month at the bank. Your current monthly payment will be paid as usual, by phone, drive thru bank, Internet or direct payment.
- To avoid this monthly trip to the bank, you can make a payment to the principal balance once a year or in a pre-established frequency. The first step for this still involves obtaining an orientation at your bank on how to do it. You can also establish a fixed monthly amount to be paid thru direct payment, but mortgage payments must be paid thru this system.
Analyze these details and evaluate if you can make payments to your principal balance. It can greatly help you reduce the amount of pending payments on your loan; therefore it’s a valuable tool from which you can take advantage on the long run. Receive an orientation and check out if you can use this idea.