Do you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.
What is mortgage amortization?
Mortgage amortization is the reduction of debt by regular payments of principal and interest over a period of time. For example, if you make a monthly mortgage payment, a portion of that payment covers interest and a portion pays down your principal.
Typically, the majority of each payment at the beginning of the loan term pays for interest and a smaller amount pays down the principal balance. Assuming regular payments, more of each following payment pays down your principal. This reduction of debt over time is amortization.
How can making extra payments help?
When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you’ll pay. Even small additional principal payments can help.
Here are a few example scenarios with some estimated results for additional payments. Let’s say you have a 30-year fixed-rate mortgage for $200,000, with an interest rate of 4%. If you make your regular payments, your monthly mortgage principal and interest payment will be $955 for the life of the loan, for a total of $343,739 (of which $143,739 is interest). If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment. When you split your payments like this, you’re making the equivalent of 1 extra monthly payment a year (26 bi-weekly payments totals 13 monthly payments). This extra payment may be applied directly to your principal balance. Be sure to first check with your lender if this is an option for your loan.
Using the same example as above, if you make a payment of $477.50 every 2 weeks, instead of 1 monthly payment of $955, you could shorten your total loan term by more than 4 years and reduce the interest paid by more than $22,000.
Paying a little extra towards your mortgage can go a long way
Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you’ll pay.
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FAQs
When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.
Does Wells Fargo apply extra payments to principal? ›
When you pay more than the total amount due, on or before the due date, the additional amount will pay down your principal balance and will be applied to your next payment due. You can pay your account up to 3 months in advance. Once the account is paid ahead 3 months, additional funds go toward principal only.
Does mortgage amortization change with extra payments? ›
Even a single extra payment made each year can reduce the amount of interest and shorten the amortization, as long as the payment goes toward the principal and not the interest. Just make sure your lender processes the payment this way.
What happens if I pay $500 extra a month on my mortgage? ›
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
Do extra payments go straight to principal? ›
Generally, national banks will allow you to pay additional funds towards the principal balance of your loan.
Do extra payments automatically go to principal? ›
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
What happens if I pay an extra $1,000 a month on my mortgage? ›
When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).
What happens if I pay an extra $200 a month on my mortgage? ›
Extra payments can reduce the number of years that you have a mortgage and save on interest rates because the mortgage was paid off early. Just make sure you let the mortgage company know that you are making a extra payment towards the principal amount.
Can amortization be written off? ›
The writing off of an intangible asset over its useful life is known as amortization expense, and the amount of an amortization expense write-off usually appears in the “depreciation and amortization” line item of the income statement.
What is the rule for loan amortization? ›
How to calculate loan amortization. You'll need to divide your annual interest rate by 12. For example, if your annual interest rate is 3%, then your monthly interest rate will be 0.25% (0.03 annual interest rate ÷ 12 months). You'll also multiply the number of years in your loan term by 12.
At its core, loan amortization helps you budget for large debts like mortgages or car loans. It's also a useful tool to demonstrate how borrowing works. By understanding your payment process up front, you can see that sometimes lower monthly installments can result in larger interest payments over time, for example.
Why is it a good idea to pay more than your amortized payment? ›
Overall, paying more than the monthly amount due on an amortized loan is a wise strategy as it reduces the total interest paid, shortens the loan term, and helps build equity. It can save you money in the long run and provide financial flexibility.
How does prepayment affect amortization? ›
To be clear, when you pay one month principal ahead, you literally move that extra month along on your amortization table. The interest payment does not "go away", but the amount you have to pay will be reduced.
Does paying extra on loan reduce interest? ›
It helps you clear your debt sooner. It may help reduce the amount of interest you are charged over the term of the loan.
Do you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.