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jonpagel
Returning Member

Extra principal on loan

So if I have a 500k loan balance, 2 years into a 20 year fixed loan…and I say pay 400k in a lump sum principal payment how does that effect my monthly payment….specifically will it change the amount of interest each month or does it just stick to the original amortization schedule and have the payments still contain pretty high interest amounts….obviously it will be paid off sooner…..I’m tempted to just pay it all off if that is the case to avoid the interest heavy payments that are in the early years of the loan…

3 Replies
VolvoGirl
Level 15

Extra principal on loan

I would ask the bank.  It should reduce the interest charge each month.  

NCperson
Level 15

Extra principal on loan

@jonpagel - the monthly payment is NOT impacted.  it just means the loan will be paid off in fewer payments. 

 

but it will change the split between interest and principal each month.  Interest will be a lot less and principal will be a lot more each month, but the payment stays the same.  

 

On  a fixed rate loan, the monthly interest is calculated as the a) the current loan balance b) times the interest rate c) divided by 12.  THat is the interest....then take the fixed rate payment and subtract the interest and what remains is the reduction in principal

 

do the same thing for the next month and the interest will be slightly less and the principal will be slightly more, but the payment is the same. 

Opus 17
Level 15

Extra principal on loan

It depends on the specifics of your loan contract.  Most of the time, your payment is fixed, and paying off a lump sum of the principle will mean that more of the future fixed payments are applied to principal and less to interest.

 

If you want a lower payment, you will need to refinance the loan, using the funds you have as additional downpayment. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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