Although the mechanics of the mortgage you describe 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 off in full with your final payment. 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 at the end of the term.
Given this dynamic, 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. You can usually pay down a balloon payment at any time and by any amount over the course of the loan.
On the flip side, the monthly payment for the mortgage that amortizes remains the same over the course of the loan which provides more certainty, even if you are required to pay a relatively high interest rate. Plus, that mortgage does not require you to make a large payment at the end of the loan term so you do not need to worry about coming up with significant funds or refinancing the mortgage.
Paying more than your required monthly payment is also called mortgage acceleration. In short, mortgage acceleration shortens the length of your loan and saves you money on interest expense over the life of your loan. The more you overpay, the more you reduce the length of your mortgage and the more money you save.
Review How Mortgage Acceleration Works
You can typically overpay or accelerate your mortgage by any amount over the course of your loan (although please note that a small number of mortgages have prepayment penalties). Some people accelerate their mortgage on a monthly basis while others overpay on an annual or periodic basis.
Additionally, it should not cost you anything to overpay your mortgage and we recommend that you do not use a third party mortgage acceleration service to manage the process. Simply add the amount of your overpayment to your mortgage check or send a separate payment to the lender and confirm with the lender that the extra funds are applied to your principal loan balance.
Use ourMortgage Acceleration Calculatorto understand how much you can save by overpaying your loan
Finally, given the complexity of your loan you may want to consider refinancing your mortgage. The decision to refinance depends on your mortgage rate, loan program, homeowners equity and other factors.
By refinancing you may be able to reduce your interest rate and monthly payment, take equity out of your home and simplify your loans. For example, refinancing a loan with a balloon payment with an amortizing mortgage removes a significant potential financial risk. You may also be able to reduce your mortgage payment depending on your new loan terms.
Use ourRefinance Calculatorto determine if refinancing makes financial sense
The table below shows refinance mortgage rates and fees for leading lenders. We recommend that you contact multiple lenders to determine if refinancing is the right option for you. Shopping lenders is also the best way to save money when you refinance.« Return to Q&A Home About the author