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Paydown is the process of reducing the amount owed on a mortgage or other loan over time by making partial payments toward the debt. A paydown can refer to any debt, such as a car loan, credit card debt or school loan.
A paydown often refers to the reduction of just the principal on a loan. The benefit of paying down the principal is that as it shrinks, so do the interest payments. Paying down the principal reduces how much will be paid out overall by the borrower.
A paydown also refers to a government or company paying more on a debt than the amount borrowed. This can occur when an organization reissues unpaid debt for less than the first issue of that debt.
Jessica buys a home for $150,000. She pays 20 percent down and borrows the remaining $120,000 from a bank in a 30-year loan. Instead of paying just her set monthly payments, she applies an additional amount to the principal each month. By expediting her paydown, Jessica reduces the interest she has to pay on the mortgage. This also helps her pay off her mortgage sooner.