Posted on: 10th Jun, 2006 04:27 pm
Will it benefit me if I pay extra towards the principal on an interest only mortgage loan?
Hi Leong,
Yes, you can do that. Extra payments will benefit you in an interest only loan as you can reduce your principal over the loan term. In an interest only loan none of your payment goes towards the principal.
Borrowers take an interest only to reduce their initial monthly payment and if they can make some excess payments that will help them.
Suppose you have $700 as your current payment with an interest only loan whereas you would have $1100 as your payment in a traditional mortgage. Now all of the $700 goes towards your interest with an interest only loan. Instead if you can make a payment of $900 then the extra $200 will go towards the principal.
In that way you are making $200 less monthly payments than you would have done with a traditional mortgage and also chipping away at the principal of the loan much faster at the same time.
Hope this information helps.
Blue
Yes, you can do that. Extra payments will benefit you in an interest only loan as you can reduce your principal over the loan term. In an interest only loan none of your payment goes towards the principal.
Borrowers take an interest only to reduce their initial monthly payment and if they can make some excess payments that will help them.
Suppose you have $700 as your current payment with an interest only loan whereas you would have $1100 as your payment in a traditional mortgage. Now all of the $700 goes towards your interest with an interest only loan. Instead if you can make a payment of $900 then the extra $200 will go towards the principal.
In that way you are making $200 less monthly payments than you would have done with a traditional mortgage and also chipping away at the principal of the loan much faster at the same time.
Hope this information helps.
Blue
thanks for the reply.