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Does Overpaying Interest Only Mortgage Reduce Payment?

Does overpaying an interest only mortgage reduce your required mortgage payment?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

Overpaying, or accelerating, an interest only mortgage reduces your required mortgage payment. The ability to apply mortgage acceleration to reduce your required payment each month is one of the key differences between an interest only mortgage and a fixed rate or adjustable rate mortgage (ARM). Applying mortgage acceleration to a fixed rate mortgage or ARM reduces your principal balance and shortens the length of your loan but does not lower your required mortgage payment for the following month.

The monthly payment for an interest only mortgage is calculated based on your interest rate and the outstanding principal loan balance. For a $100,000 mortgage with a 4.000% rate, the required monthly payment is $333 ($100,000 loan balance * 4.000% = $4,000 / 12 months = $333). Because you do not pay principal and only interest, your monthly payment does not change during the interest only period of the mortgage.

If you overpay your mortgage, you reduce your loan balance so the required monthly payment is lower. For example, if you added $1,000 to your payment, your new loan balance is $99,000 which means your required payment for the next month is $330 instead of $333 ($99,000 loan balance * 4.000% = $3,960 / 12 months = $330).

If you continue to overpay your mortgage each month (or even periodically), your required monthly interest only payment continues to decrease. This example shows only a small reduction in your required payment but the more you overpay your loan, the greater the reduction.

Review How Interest Only Mortgage Acceleration Works

There are two main ways to overpay an interest only mortgage. The first is to make the same payment every month. So if your initial required monthly payment is $500, you pay $550 monthly. With this approach the amount you overpay your mortgage by increases every month because your required payment decreases with each overpayment.

For example, in the first month, $50 of your payment goes to pay down principal. In the second month, depending on your loan balance, interest rate and other factors, maybe $52 of your $550 payment goes to pay down principal. In short, more of your payment reduces your principal balance every month.

The second way to accelerate an interest only mortgage is to overpay by the same amount monthly. In this case, if your required monthly payment is $500 and you want to overpay your mortgage by $50 your initial payment is $550. If your second required monthly payment is $498, you pay $548 -- so you continue to overpay your mortgage by a fixed amount every month.

Use ourINTEREST ONLY MORTGAGE ACCELERATION CALCULATORto evaluate different overpayment options

You can also accelerate an interest only mortgage on an annual, semi-annual or one-off basis. The ability to control when and by how much you pay down your loan balance is one of the main advantages of an interest only mortgage. Paying down your principal balance during the interest only period can help reduce the risk of payment shock when the loan starts to amortize and your interest rate can also potentially increase.

The table below shows interest only mortgage rates and fees for lenders near you.  We recommend that you contact multiple lenders to find the best loan terms.  Comparing lenders is the best way to save money on your mortgage.

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Current Interest Only Mortgage Rates as of December 10, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

There are a couple of other points to keep in mind if you are considering accelerating an interest only mortgage. First, your required monthly payment only decreases if you overpay your loan during the interest only period.

As referenced above, most interest only mortgages start to amortize after a certain period of time -- usually three, five, seven or ten years. If you overpay the loan during the amortization period, you reduce the length of the loan and your total interest cost, but your required payment for the next month does not decrease.

Finally, you should never pay a fee to overpay your mortgage. You can accelerate your loan at any time by any amount by adding the extra amount to your payment or by paying down your principal balance directly.

If you pay your mortgage by check, note the amount of funds that you want applied to your principal balance. If you pay your loan via automatic deduction from your bank account you may need to make a separate overpayment to the lender directly. Either way, you should always keep a record of any extra payments you make to ensure that your lender correctly applies them to your mortgage balance.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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