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Understanding Principal-Only Payments

At O1ne Mortgage, we aim to provide you with the best mortgage services. If you have any questions or need assistance, please call us at 213-732-3074.

What Is a Principal-Only Payment?

A principal-only payment is an additional payment made towards the principal balance of a loan. The principal is the amount you originally borrowed, which accrues interest over time. By making principal-only payments, you can reduce the principal balance faster, potentially saving money on interest and paying off the loan earlier.

Pros and Cons of Principal-Only Payments

Pros

• Pay less interest overall: Reducing the principal balance results in less interest accruing over the life of the loan, saving you money.
• Pay off the loan sooner: Extra payments can help you pay off the loan earlier than scheduled.
• Flexible payment amounts: You can make principal-only payments whenever you have extra funds, without committing to a fixed additional amount each month.

Cons

• Monthly payments remain the same: Your regular monthly payment will not decrease, even if you make large principal-only payments.
• Reduced available cash: Extra payments reduce the cash you have on hand for other expenses or opportunities.
• Potential lack of benefits: Some loans have precomputed interest or prepayment penalties, which may limit the benefits of making extra payments.

Is It Better to Pay Principal or Interest?

Standard loan payments typically cover accrued interest and fees first, with any remaining amount applied to the principal. While you often cannot choose how standard payments are applied, making extra payments towards the principal can help you achieve your goal of paying off the loan faster.

If you have significantly reduced your loan balance, you might consider recasting your loan. Recasting adjusts your monthly payment based on the current balance, potentially lowering your payment without the need for a new loan application. However, there may be a fee for this service.

Conclusion

Making principal-only payments can be a smart strategy to save on interest and pay off your loan sooner. However, it’s important to weigh the pros and cons and consult with your loan servicer to ensure it aligns with your financial goals.

For personalized mortgage advice and services, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your mortgage options and make informed decisions.

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