Extra principal won't reduce mortgage payments

 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.

[table]

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.

http://www.bankrate.com/nltrack/news/DrDon/20060119a1.asp

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What on earth made you think most people need to be told something that
simple?

 Maybe because if you have an adjustable-rate mortgage, each time it
adjusts it recalculates the payments based on however much principal
actually remains.  So extra principal WILL reduce future payments
(after the next adjustment).

Shaun Eli
www.BrainChampagne.com
Brain Champagne:  Clever Comedy for Smart Minds (sm)
now with stand-up comedy video on the website!

 On 22 Jan 2006 10:29:36 -0800, "Shaun Eli"


Wrong.  It will reduce the number of payments.