 Extra
principal won't reduce mortgage payments
|
 Dear
Dr. Don,
Once a mortgage is set up and I decide to pay
extra on the principal, should my actual monthly payments go down?
Thanks,
-- Tom Treatment
 Dear
Tom,
Additional principal payments on a conventional fixed-rate mortgage
reduce the principal balance but don't reduce the required monthly
payment. A conventional mortgage is self-amortizing, meaning the
monthly payment covers both the interest expense and the repayment
of principal. Each monthly payment is split into two component parts,
interest expense and principal repayment.
Additional principal payments change
the dollar amounts going toward principal and interest in subsequent
mortgage payments, because lowering the outstanding loan balance
reduces the monthly interest expense. The payment stays the same,
but the amount going toward principal increases, reducing the length
of the loan and the total interest expense.
The table below shows a comparison between a 30-year
fixed-rate mortgage with no additional principal payments, a mortgage
with one lump-sum additional principal payment and a mortgage where
a small amount is added to each monthly mortgage payment.
I used Bankrate's mortgage payment calculator
and the amortization schedule provided by that calculator to arrive
at these numbers. It's an easy way to see precisely how additional
principal payments reduce interest expense and shorten the life
of your loan.
| |
Conventional
30-year fixed-rate mortgage |
One-time
additional principal payment |
With
monthly additional principal payment |
| Loan amount: |
$ 150,000
|
$ 150,000
|
$150,000
|
| Loan term (months): |
360
|
360
|
360
|
| Interest rate: |
6.25%
|
6.25%
|
6.25%
|
| Mortgage payment: |
$ 923.58
|
$923.58
|
$923.58
|
| Additional principal payment: |
$0
|
$1,000.00
|
$20.00
|
| Total payments: |
$ 332,487
|
$327,130
|
$319,696
|
| Interest expense: |
$ 182,487
|
$177,130
|
$169,696
|
| Life of loan (months): |
360
|
354
|
339
|
| Life of loan (years): |
30
|
29.5
|
28.25
|
In this example, a $1,000 one-time
payment reduced the life of the loan by one-half of a year and reduced
interest expense by more than $5,000. Paying an extra $20 per month
shortened the loan by 1¾ years and saved more than $12,000
in interest expense. Decide what you are able to do in your monthly
budget, and use the calculator to see how it impacts your loan.
If your goal is a lower monthly mortgage payment,
additional principal payments won't help. But if the goal is to
pay off your loan early, it's easily accomplished.
|
