Monday, October 13, 2008

Extra Payments on Interest-Only Loans

Q: If a borrower has an interest-only loan and makes a payment towards the principal, does the payment go down or does the loan get paid off sooner?

A: The monthly payment for an interest-only loan is calculated by multiplying the principal by the interest rate, and then dividing by 12. So every time a borrower makes a principal payment, their monthly mortgage payment goes down.

On a fully amortized loan (both principal and interest payments are made each month), if the borrower makes an extra payment towards the principal, the payment stays the same, but the loan will be paid off sooner.

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