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Mortgage  Question?
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Does overpaying interest only mortgage reduce payment?

I am thinking of refinancing a fixed rate mortgage with an interest only mortgage but continuing to make the same payment. Does overpaying an interest only mortgage reduce your required mortgage payment each month?

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

You can apply mortgage acceleration (making more than the required monthly payment) to an interest only mortgage to pay down principal and lower your required mortgage payment each month. 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 fixed rate mortgage or adjustable rate mortgage (ARM). Applying mortgage acceleration to a fixed rate mortgage or ARM reduces your principal balance but does not lower your required mortgage payment.

We provide a Comprehensive Overview of Interest Only Mortgage Acceleration as well as an Interest Only Mortgage Acceleration Calculator on FREEandCLEAR. With our acceleration calculator you can evaluate making the same mortgage payment each month (in which case you overpay your mortgage by a greater amount each month) or making the same overpayment each month (in which case your payment decreases each month, even with the overpayment). You can also use the calculator to understand how different methods and amounts of overpayment reduce your principal balance during the interest only period of the mortgage.

When you are considering your mortgage refinance options it is important to factor in closing costs because the benefits of a lower monthly mortgage payment may not outweigh the cost to refinance your mortgage. For example, if you pay $4,500 in refinance closing costs and save $100 per month on your new mortgage payment then it will take you three and three quarter years to recover, or breakeven on, your closing costs. You can use our Mortgage Refinance Calculator to determine the breakeven point for a refinance based on different levels of closing costs. If you are able to refinance at a lower interest rate with a no cost mortgage then refinancing can make a lot of sense.

Finally, in addition to refinancing into an interest only mortgage, you may also want to consider an adjustable rate mortgage (ARM). The current interest rate for a 10/1 ARM (fixed rate for the first 10 years and then adjusts annually) is approximately 3.375%, which is lower than your current mortgage rate. An ARM should have a lower required monthly payment than a fixed rate mortgage but a higher payment than the interest only mortgage. Unlike an interest only mortgage, however, with an ARM you pay down your principal balance during the initial period of the loan plus you can also apply mortgage acceleration to an ARM to reduce your loan balance even more.

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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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