The Impact of Extra Mortgage Payments

The web is full of opinions listing the pros and cons of making extra mortgage payments, but there are surprisingly few pieces on how extra payments impact your mortgage payments. Turns out that the answer depends on which of the four main types of mortgage you have. Yahoo Finance gives thoughts on each of these including standard fixed-rate mortgages, standard adjustable-rate mortgages, interest-only mortgages, and home ownership accelerator loans. A few interesting highlights listed from least responsive to most responsive extra-payment home loans:

“Extra payments on a fixed-rate mortgage shortens the payoff period but do not affect the monthly payment.”

“With an ARM on which the borrower is making the fully amortizing payment, extra payments do change the monthly payment, but not until the next rate adjustment. At that point, the payment is recalculated using the reduced balance and the original term.”

“If a loan is interest-only, the payment should decline in the month following an extra payment, whether the loan is fixed-rate or adjustable-rate.”

“The most responsive type of mortgage is the home ownership accelerator, because it has no required payment, only a maximum balance. So long as the actual balance is lower than the maximum, the borrower need make no payment at all.”

And if you’re in the mood for a bit of point-counterpoint today, you can also check out Don’t rush to pay off that mortgage and Paying Off a Mortgage Versus Investing.

Will Making a Large Payment to Principal Reduce Monthly Payments? [Yahoo Finance]


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