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When making extra mortgage payments and given the option to pay towards principal or Interest, which is better?
First, I applaud the effort to pay down your mortgage early!
When applying the extra payment, it is normally better to make sure it applies to principal first. As the principal of the loan is reduced over time, less interest is generated, saving you money over the life of the loan. If you paid the extra toward interest, you might see a limited benefit on your taxes, only if you deduct mortgage interest paid. However, this may not be a large benefit, and is offset by keeping more principal on the loan that makes money for the lender over time. As with all things related to tax, discuss the pros and cons of this decision with your tax advisor.
As a quick check, before you make extra payments on the mortgage, you want to have paid down higher interest items like credit card or car loan debt, on top of covering the other financial foundations like emergency savings, contributing to retirement plans, and protecting your life and loved ones with the right insurances.
Thanks for the question, and good luck!