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How is my loan balance affected if I overpay mortgage?

If I send an extra money with my monthly mortgage payment, how is my loan balance affected?

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

In short, any extra money you include above your required mortgage payment goes to pay down your principal loan balance. This assumes that you have no late payments, fees or other charges due on your account, which would be paid off first. If your account is current, however, then any overpayment reduces your mortgage balance and enables you to pay off your loan faster.

For example, if your scheduled monthly mortgage payment is $2,000 and you submit a payment for $3,000, then the extra $1,000 pays down your current principal balance. If your loan balance was scheduled to be $150,000 after your current monthly payment, your actual balance is $149,00 due to the $1,000 overpayment.

Review How Mortgage Acceleration Works

If you have a fixed rate mortgage your monthly payment does not change but paying down your loan balance reduces the interest expense you owe, which means a greater portion of your subsequent monthly payments goes to pay down principal.

So if your next scheduled mortgage payment of $2,000 was supposed to be split between $1,500 in interest and $500 in principal, because you overpaid your mortgage in the past, the payment may now be comprised of $1,475 in interest and $525 in principal, depending on your mortgage rate and length. The greater the principal component of your loan payment, the faster you pay down your mortgage.

Paying more than your required mortgage payment is also called mortgage acceleration. The more you overpay your loan, the faster you pay it off and the more money you save in interest cost. For example, if you consistently accelerate your mortgage you can reduce your mortgage term by a number of years. If you have a 30 year mortgage, you may be able to pay it off in 25 years or less by paying more than your required payment every month.

Use ourMORTGAGE ACCELERATION CALCULATORto determine how much money you can save by overpaying your loan

If you have an adjustable rate mortgage (ARM) instead of a fixed rate mortgage, then overpaying your loan may reduce your required monthly payment. With an ARM, your mortgage re-amortizes every time it adjusts -- usually every six or twelve months -- and if you accelerate your loan, your monthly payment may decrease, depending on how your mortgage rate changes.

If you have an interest only mortgage, accelerating your loan usually reduces your required mortgage payment for the next month because you have paid down the principal loan balance used to calculate your payment. If your interest only loan starts to amortize or interest rates go up, your payment may increase but the potential increase is lower than what it would have been if you did not overpay the loan.

There are a couple of important points to be aware of if you decide to overpay your mortgage. First, you can accelerate your mortgage at any time, by any amount on your own, for free. Some companies attempt to charge you to accelerate your mortgage but they are usually a waste of time and money.

If you want to overpay your loan, simply increase the payment you make or submit a separate check or payment to your lender. When you increase your payment or make a separate payment, note that the extra money goes to pay down your principal loan balance.

It is also important to confirm that the lender applies the extra payment to your account. You can request a mortgage payment history from your lender that provides a detailed accounting and timing of all principal and interest payments for your account. If you accelerate your mortgage we recommend that you review your payment history on an annual basis to make sure that your account accurately reflects any extra payments.

Sources

Mortgage Acceleration Scams: https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-mortgage-payment-company-and-servicer-for-deceptive-ads/

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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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