After you’ve gotten that first or second big paycheck as a doctor, you may be wondering if you should make an extra (principal-only) mortgage payment. You may have been told that as a homeowner, this is a great way to reduce your loan term or the total interest paid over the life of your loan. Principal-only mortgage payments are one way to accomplish these goals, but is this strategy right for you?

Here are the basics of principal-only mortgage payments and what you should consider before you make them.

What is a principal-only mortgage payment?

A principal-only mortgage payment is a type of payment made by a borrower on a loan where the entire payment amount is applied directly to the principal balance of the loan.

In a typical mortgage payment, a portion of your payment is paid toward the interest, and the remaining portion is paid toward your principal balance. With a principal-only mortgage payment, the entire payment goes toward reducing your loan’s principal balance.

A principal-only mortgage payment is used as an additional payment on top of your monthly mortgage payments.

Mortgage terms

• Principal is the amount of money that you originally borrowed or the remaining amount of the loan that you still owe, excluding interest.
• Interest is the cost of borrowing money. It is calculated as a percentage of the principal balance.

Learn more about mortgage basics.

Pros & cons of principal-only mortgage payments

What are the pros and cons of principal-only mortgage payments for doctors? Here are some to consider:

Benefits of making principal-only mortgage payments

• Reduced total interest paid: By making additional payments directly to the principal, you reduce the principal balance faster, which in turn reduces the amount of interest that accrues over the life of the loan.
• Faster repayment: Paying down the principal more quickly can shorten the term of the loan, meaning you’ll pay off the mortgage sooner.
• Building equity faster: Reducing the principal balance faster helps build home equity more quickly.

Drawbacks of making principal-only mortgage payments

• Impact on immediate cash flow: Making principal-only mortgage payments means you will have less cash on hand. If you are stretching your budget too thin (as some new doctors with a new, bigger paycheck grapple with lifestyle inflation may be prone to do), you may put yourself at risk if an unexpected expense arises.
• Potential penalties or fees from lenders: Not all lenders allow principal-only payments. It’s important to check with your lender to ensure that there are no prepayment penalties that might negate the benefits of making additional payments.
• Opportunity cost of alternative investments: While paying down the mortgage principal can save money on interest, it’s important to consider whether this is the best use of extra funds compared to other investments or financial obligations. Consulting with a financial advisor could help you determine the best strategy for your needs.

Get connected to an experienced financial advisor for free.

Should I make principal-only mortgage payments?

Principal-only mortgage payments can be beneficial to some but may not help all borrowers.

When principal-only mortgage payments might be beneficial

• You have a high-interest mortgage rate: Especially if your loan has a high-interest rate, making additional principal-only payments can significantly reduce the total interest you pay over the life of your loan.
• You have a stable, high income with extra disposable income: If your income comfortably covers all your expenses and leaves you with significant disposable income, directing some of that surplus toward your mortgage can be a wise move without jeopardizing your financial security.
• You want to achieve long-term financial goals: Making principal-only mortgage payments means you are building equity in your home faster. It can also contribute to a more financially secure retirement.

When principal-only mortgage payments might not be beneficial

• You lack significant cash reserves or an emergency fund: If you don’t have sufficient cash reserves or a well-funded emergency fund, it’s crucial to prioritize building these before making extra mortgage payments to avoid risk associated with unexpected expenses or financial emergencies (for example, if you get into a car accident and need to finance repairs, like founder Dr. Michael Jerkins).
• You have higher return opportunities through investments: Extra funds might yield higher returns if invested in the stock market, retirement accounts, or other investments, especially if your mortgage interest rate is relatively low.
• You have short-term financial goals: If you are saving for a major purchase, tackling higher-interest debt, paying off your own costly student loans, or saving for a child’s future education, it may be more beneficial to allocate funds to these goals rather than your mortgage.
• Your income is unstable: In situations of uncertain or unstable income (such as some locum tenens temporary gigs that are unpredictable), retaining cash and maintaining liquidity is crucial. Making extra mortgage payments could strain your finances if your income decreases or fluctuates.

Principal-only mortgage payment example

Let’s take a look at how making periodic principal-only mortgage payments can impact your total interest paid.

For this example, we are using a 30-year mortgage term, the average mortgage interest rate as of June 11, 2024, 7.12%, and the average home price in the U.S. as of June 11, 2024, $358,734. We calculated a 10% down payment ($35,873), so this borrower’s loan amount is $322,861.

We used MortgageCalculator.Org’s What If I Pay More Calculator and Advanced Mortgage Calculator.