Although the mechanics of the mortgage you described in your question are relatively unusual, in general it makes sense to pay down a balloon payment loan before you pay down an amortizing loan. The principal balance of an amortizing loan decreases over time as you make your regularly scheduled payments until the loan is paid in full with the final payment of the loan term. In contrast, the principal balance for a balloon payment loan does not decrease over time and the borrower is usually required to make a large, one-time payment when the loan is due in full at the end of the term. Paying down a balloon payment loan in advance of the due date is usually a smart risk mitigation strategy in the event that you do not have the funds to pay off the principal balance or refinance the loan when it is due.
Paying more than your required monthly payment is also called mortgage acceleration. We provide a thorough overview of How Mortgage Acceleration Works on FREEandCLEAR. In short, mortgage acceleration shortens the length of your loan and saves you money on interest expense over the life of your loan. You can use our Mortgage Acceleration Calculator to evaluate different acceleration scenarios for your loan.
Additionally, given the complexity of your loan as well as your relatively high interest rate you may want to consider refinancing your mortgage. The decision to refinance depends on your interest rate, loan program and other factors. By refinancing you may be able to reduce your mortgage rate and perhaps take equity out of your home. You can use our Refinance Calculator to understand the financial impact of refinancing and review our helpful overview of reasons to refinance your mortgage.
We always recommend that you contact multiple lenders to understand your refinance options. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as comparing lenders is the best way to save money on your mortgage.