Extra principal on loan

[jonpagel]

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…

[VolvoGirl]

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

[NCperson]

@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]

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. 

[Eabrill]

Your monthly pmts won't change, Sounds  a bit  like my HELOC, which calls for 240 equal principal payments (nondeductible) plus interest (deductible, hough the dollar "cap" affects us here in SF) on the unpaid balance at a floating rate based on prime. The difference: Your loan sounds fully amortized, which yields identical monthly pmts. Either way, your loan (and mine) is prepayable, and must be prepaid on certain events,  such as a sale or refinancing, True enough, fully amortized pmts are interest-heavy in earlier years, but that's not reason enough to switch. I'd stick with what you have, and thereby deduct less interest each year as more and more of your pmts go to principal.

Did Intuit get it wrong? I think so. In their example of nondeductible interest, they include borrowing money for a DP on a second home , where loan interest is clearly deductible. Intuit says it's not. 

[NCperson]

@Eabrill - not sure what example you are referring to, but if you borrow money against your primary home and use that money as the downpayment on a 2nd home, the interest is NOT deductible,  

Cash out on your primary home (and that is what this would be) that is not used to improve (i.e. capital improvments) that primary home is not deductible.  Clearly, borrowing money against the primary home to create a down payment on a 2nd home doesn't improve the 1st home......hence no deduction.