Question:

What is the effect of making additional payments on mortgage?

Answer:

The effect of making additional payments on mortgage is great. Especially if you make them every month rather than once a year since the principal is reduced faster and hence interest to pay is also greatly reduced.

Example of Additional Payments on Mortgage

Consider you have a $200,000 fixed rate mortgage loan at 6% for 30-year period. Your monthly mortgage payment is $1199.10 (principal & interest only) and you choose to make an extra $100 payment towards the principal every month.

If your loan started on June 1, 2008 it is expected to amortize in June 2038. Instead, the loan amortizes fully in December 2032 and saves you over $49,000 in interest.

Without the $100 monthly prepayment the interest cost of the loan would be over $231,000. With the additional mortgage payment the interest cost of the mortgage is $182,000 and the home loan amortizes 5 years 5 months earlier.

So, making additional payments on a home loan does have an impact. If you want to use such a repayment schedule, you could contact the Customer Service Department of your bank to find out how prepayment is done.

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Common misspellings: mortage and morgage