To pay down mortgage early, apply extra to the principal

Ilyce Glink and Samuel Tamkin

Q: Does making an extra payment on your mortgage pay down your loan faster? When you make an extra payment, do you apply all of that to principal or just a normal payment as usual?

A: Your monthly mortgage payment is made up of what you owe on your loan for the repayment of principal and the payment of interest. For most borrowers, you might also have a payment to the lender toward your escrows for the payment of real-estate taxes and homeowners insurance. Finally, you might also have to make a payment toward your mortgage insurance.

When you want to reduce the term of your loan, you have to pay the lender extra money toward the principal of the loan. In other words, if you took out a fixed- interest loan for $100,000 on a 30- year term, you'll pay off that loan in full at the end of 30 years. To shorten the life of the loan, you'd have to pay extra to the lender to bring down the principal amount of $100,000.

Your extra payments must always be made to reduce the principal on your loan. On your coupon book, you may see a line item where you can write in the extra amount you are paying to reduce the principal balance on your loan.

As a side note, if you pay down the principal on a variable- rate loan, when the lender reamortizes your loan to reduce your loan payments, you will still end up with a 30-year loan term. You can only shorten the term by paying off the loan entirely.

An exception with adjustable- rate mortgages is when interest rates are going up and if your payments to reduce the principal on your loan don't significantly reduce the loan balance you owe; you'll still end up paying monthly payments to the lender for the entire term of the loan, but any reductions on principal payments you would have made should have saved you on the amount of interest you paid over the life of the loan.