ADDITIONAL PRINCIPAL PAYMENT Meaning and
Definition
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Additional Principal Payment refers to the extra amount of money paid towards the outstanding principal balance of a loan, mortgage, or other debt instrument, on top of the regular monthly installments or scheduled payments. This additional payment is made voluntarily by the borrower with the intention of reducing the overall term or interest payments of the loan.
When a borrower makes an additional principal payment, it directly impacts the amount owed in principal, as opposed to the interest portion of the loan. By reducing the principal balance faster than the scheduled repayment plan, the borrower can potentially shorten the term of the loan, save on interest costs, or both. It is particularly advantageous for borrowers seeking to build home equity more quickly or aiming to pay off their loan ahead of the agreed repayment term.
The additional principal payment can be a fixed amount or a percentage of the regular monthly payment. Some borrowers may opt to make these payments periodically, while others choose to make lump-sum payments at specific intervals, such as when they receive a bonus or windfall.
It is important to note that additional principal payments are typically applied towards the principal balance and not towards future loan installments. Therefore, these payments do not exempt the borrower from making regular monthly payments as agreed upon with the lender. Additionally, borrowers should confirm with their lender or mortgage provider regarding any potential fees, penalties, or restrictions associated with making additional principal payments.
