Prepaying your mortgage is a great idea if you can afford to pay extra. Especially if you are going to be in your house long term, or forever. The best way to save money on debt is to not have it! But many people do not realize that prepaying a fixed rate loan does not reduce the monthly payment. Prepaying a loan simply shortens the term. So prepayment builds equity faster, and ends the loan sooner. You save money by having the loan for a lesser amount of time.
I won’t save money on a monthly basis
Most mortgages offer the ability to prepay principal early without penalty. Early payments of part of the principal will reduce the total cost of the loan and will shorten the amount of time needed to pay off the loan. But paying an extra $250 a month, or paying off a big hunk of the mortgage all at once, will not reduce the monthly payment on a fixed rate loan.
Adjustable Rate Mortgages might be different
However, on an ARM (adjustable rate mortgage) loan if you prepay some of the balance, when the interest rate adjusts the loan resets, and the new monthly payment is based on the most recent balance. But since it seems most ARM loans these days are 5 or 7 year ARMs, where the payment is fixed for many years, an interest rate change and reset may not occur at the same time as a principal pay down. And most loans it seems are fixed rate, especially with rates so low these days. Not many people are taking ARM loans now.
You can try different prepayment scenarios by using my Mortgage Payoff Calculator.
Conclusion
So please do pay down your loan if you can. I do. I have owned my home for 6 years, and started paying it off on a 20 year amortization instead of a 30 year right from the start. I only have 14 years left as a result! Now if I only had not bought at the height of the market….oh well.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
I understand it doesn’t change the total monthly payment but does it change how much principle vs interest is paid every month??
No, the principal and interest (P&I) also do not change. All that happens is that the end date of the loan arrives faster, everything else stays status quo, including the breakdown of P&I.