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I recently refinanced my home based on the 250k remaining balance of my mortgage. If I pay additional principal each month, does that reduce the amount of interest I will owe the following month? So let's say I make an additional principal payment of $10k in March. When I make my monthly payment in April, will the amount of interest they charge be based on $240k? Or am I always paying interest based off the original amount of the loan (250k)?
I recently refinanced my home based on the 250k remaining balance of my mortgage. If I pay additional principal each month, does that reduce the amount of interest I will owe the following month? So let's say I make an additional principal payment of $10k in March. When I make my monthly payment in April, will the amount of interest they charge be based on $240k? Or am I always paying interest based off the original amount of the loan (250k)?
Unless your lender agrees to "reset" your underlying mortgage amount (very rare), you will continue to pay interest based on the original amount of the loan. However, you will ultimately make fewer monthly payments than originally agreed to.
I disagree with the above. You have to make the exact same payment the next month that you always make, but more will go towards your principle as the interest is calculated on what's remaining. That's how you can wipe off several years of interest on a 30 year loan by just making 1 extra payment a year. If your interest is always based on the original amount, you could never get ahead of the interest.
By the way, it's not going to change it by much, like a couple of bucks.
I disagree with the above. You have to make the exact same payment the next month that you always make, but more will go towards your principle as the interest is calculated on what's remaining. That's how you can wipe off several years of interest on a 30 year loan by just making 1 extra payment a year. If your interest is always based on the original amount, you could never get ahead of the interest.
By the way, it's not going to change it by much, like a couple of bucks.
Thanks. That's what I was trying to figure out. I was thinking what's the point of making additional principal payments if I would ultimately owe the same amount of interest by the end of the loan.
Simple answer is NO if you have a fixed rate mortgage. What the extra payment will do is reduce the principal you owed so the term of you loan is reduced. The interests is pre-calculated.
Extra principal payments has bigger effects at the beginning of a fixed mortgage.
The people saying no either don't understand amortization or don't understand your question.
Let's say your P&I portion of your payment is $750, which in your first month is $150 principal and $600 interest. I'm going to ignore taxes and insurance, since they aren't effected by making extra principal payments. I'm making up these numbers, without doing any math, so they obviously aren't exact, but I want to give you an idea.
If you just pay your base $750, then in month 2, your $750 will go $150.50 to principal and $599.50 to interest. In the 3rd month, maybe you pay $151.02 in principal and $597.98 in interest.
Now let's say you instead pay an extra $100 per month toward principal each month. Then in month 1, your $850 will go $250 to principal and $600 to interest. So now your principal balance is lower than in scenario 1. So in month 2, the interest is less, so say $251.00 goes to principal and $599 goes to interest. That pays down the principal even more, so now in month 3, maybe $253.50 goes to principal and $596.50 goes to interest.
Your payment stays the same every month, but what portion goes to interest is based on your CURRENT balance at that time. So the faster the principal is paid off, the faster the interest portion drops. It is true that this is more beneficial if done earlier in the loan.
This is all assuming you have an amortized loan. Most of them are, but not all. I recently refi'd to a non-amortized 12 year loan. I didn't even know there was such a thing. So on my loan, the interest is precalculated, like a car loan, and the only way to save interest is by paying off the loan early. Extra payments I make in the meantime just move my "next due date" out to a later date. Most mortgages are amortized, though and work as I said above.
I recently refinanced my home based on the 250k remaining balance of my mortgage. If I pay additional principal each month, does that reduce the amount of interest I will owe the following month? So let's say I make an additional principal payment of $10k in March. When I make my monthly payment in April, will the amount of interest they charge be based on $240k? Or am I always paying interest based off the original amount of the loan (250k)?
Your answer is yes. We paid off our home paying extra towards principle.
Although the payment and the interest rate stays the same. What you are doing by sending extra is lowering the Net Effective Rate you are being charged on the loan. The total amount of interested charged is less because the principle is smaller.
The time to start paying extra towards principle is within the first year of the loan to get the best results.
When you do send extra - make sure you add a note to "add towards principle". If you don't most lenders add to your escrow account.
What your looking for is an excel loan amortization schedule -download into your computer by clicking link below.
Unless your lender agrees to "reset" your underlying mortgage amount (very rare), you will continue to pay interest based on the original amount of the loan.
HUH?? I think you meant that the amount of the monthly payment remains the same. The interest paid on a properly amortized loan should go down with each successive month.
Interest is based on the remaining balance. In the OP's case ,$240,000. The monthly payment is based on the original amount and stays the same. You must tell the lender that it is principal payment and not normal payments that you are making ahead of time.
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