PITI

• To understand how extra principal impacts your mortgage you need to first understand the elements of the typical PITI payment. PITI stands for principal, interest, taxes and insurance, which are the four main elements of a typical monthly mortgage payment. Principal is the amount that goes toward your balance. Interest is what you pay the lender for financing the loan. Taxes and insurance are amounts you commonly pay into an escrow account and the lender pays toward your property tax and homeowner insurance obligations.
  
  

Amortization

• Typical home loans have amortized repayment schedules. On a 30-year fixed rate mortgage, for instance, your schedule begins with 360 payments over the repayment period. Each month, you make your mortgage payment and the lender allocates a certain amount toward the principal loan balance and another amount as interest. Early on, the interest proportion is much higher because the interest is based on the remaining loan balance. On a $200,000 loan with a 4.5 percent interest rate, MyAmortizationChart.com shows $8,934.00 going to interest and $3,226.00 going toward principal during the first year.
  
  

Paying Extra

• When you pay extra principal on your mortgage, you speed up the repayment schedule in a couple ways. First, you pay down your balance more quickly just because of the extra principal. But by reducing your principal balance faster, you also more quickly turn over the proportion going to interest versus principal. Thus, your regular payments begin to positively impact your principal balance more efficiently. Even a few dollars a month can shave months or years off a 30-year loan.
  
  

Pros and Cons

• J.D. Roth of Get Rich Slowly agrees with Weston that there are psychological benefits to paying down your mortgage more quickly and owning your home sooner in his February 2008 article "Mortgage Prepayment Made Easy: Own Your Home in Half the Time." However, Weston notes that doing so may not serve as your best investment of extra cash. At the 4.19 percent national average 30-year loan rate on August 21, 2011, your real interest rate is closer to 3 percent considering your tax deduction for mortgage interest. Weston says paying higher rate credit cards or investing in retirement or investment with greater returns makes more financial sense.