Fixed rate mortgage: Paying more to principal balance

malmit · Joined: 07 Jan 2007 Posts: 2

If I pay more towards the principal balance each month for my 15 year fixed rate mortgage does that reduce the amount of interest that I will eventually pay at the end or the mortgage or would I still need to pay the interest that was amortized into the mortgage when I first bought the house?

chow · Posted: Sun Jan 07, 2007 12:21 pm Post subject:

Mortgages are simple interest loans. If you pay the balance down faster, you will pay less interest. :wink:

DallasLoanGuy · Joined: 26 Sep 2006 Posts: 169 Location: Dallas, TX

agree with chow.

also.... no interest is 'amortized into the loan' at the start.

ALL interest incurred during january is paid at the first of february....

your payment will remain the same, but every month you pay extra.... you incur less interest the following month. so more of your pmt goes to principle.

get it?

rkumar · Joined: 22 Feb 2007 Posts: 10 Location: CA

so this is very much like that. "pay faster, pay less" I believe i have made good saying
what you people think :P

The Expert · Joined: 17 Feb 2007 Posts: 14 Location: Independence, KY

The faster you pay down the principle the less interest you would pay and the faster you would pay your loan off.

For example you could take a 30year mortgage and make a biweekly payment, which means you would make 26-27 payments a year which would be the equivalent to 13 or 13.5 monthly payments a year instead of 12. Just by using this simple strategy you could pay off your 30 year mortgage in about 22 years and save 1000's on interest.

m2c · Joined: 03 Aug 2005 Posts: 743

AL...AL...AL. I'm tired of folks in the industry misusing this term. Hasn't anyone read a mortgage deed!

Queen_Jaci · Joined: 24 Jan 2008 Posts: 1

If you had say a 196k loan, 30 years, 8.00% interest rate and decided to pay an extra 1k off say tomorrow, does this mean it automatically goes to 195k or does it get eaten away?

m2c · Joined: 03 Aug 2005 Posts: 743

Strangely enough, the party who sees something “eaten away” is the security issuer. Ignoring the time of the month for your “tomorrow”, lets say in your example the figures are the same and your loan is current, i.e., it’s January and you’ve made your January payment paying interest to 1/1/08.

From your perspective you’ve changed the remaining term on your mortgage from 360 months to 353. To sound like a jerk, you have “saved” 8 payments at $1,438.18 each – or $11,505. Obviously I’ve ignored the time value of money but at 8% rate, it should be a good move.

Assuming your loan is in a mortgage back security, the issuer is the loser but not to a large degree. Since security payouts are calculated on prior security balance, the servicer will have to advance a months interest on the $1,000 to keep the security balance in line with the balances of the underlying mortgage. Not a huge amount ($6.67) but this is is gone forever and is where the money is “eaten away”. Before you ask, if your mortgage is prepaid (February payment paid in January), it’s a wash. If your mortgage is in a more advanced prepaid state, there is a benefit to the servicer. In general the advanced prepaid state is very unusual.