Extra Payments: How Do They Affect Amortization?

The whole idea of Extra Payments is to accelerate the amortization of your loan, i.e. to relieve you of your debt as soon as possible. Should you happen to receive a bonus pay at work or some other extra money, investing it in Extra Payments is always a wise move.

However, you should bear in mind the differences in how Additional Payments work with Fixed and Adjustable Rate Mortgages:

Fixed Rate Mortgages

The main distinctive feature of a Fixed Rate Mortgage is the fixed, i.e. unchangeable, amount of your monthly payments throughout the whole life of the loan. In such a case, all the Extra Payments you make accumulate as additional equity, thus reducing your debt and making the overall repayment period shorter. This situation also gives you a considerable financial advantage if you decide to refinance your mortgage.

Adjustable Rate Mortgages

The positive effect of Additional Payments on Adjustable Rate Mortgages is achieved in quite a different way, though. This difference is determined by the mechanism of calculating your monthly payments. As the rate changes, the monthly payments get recalculated on the basis of your loan balance current to the day and the new rate. All the Extra Payments you have made before a certain rate change affect your loan balance and thus, the amount of your following period payments. Depending on the total amount of Additional Payments made, your next monthly payment may become smaller even if the rate is raised. Well-timed Extra Payments, along with a refinancing of your loan into a Fixed Rate Mortgage, can reduce the risk of foreclosure under the pressure of a constantly rising interest rate.

Interest-Only Mortgages

Additional Payments do not affect the amount of your period payments as long as the rate stays the same. However, the equity accumulated will make a certain difference if you start with fully-amortized payments, or in the case of refinancing.

Sounds great, but what’s in it for you and your loan? The Mortgage Calculator is the best way to get a clear picture of when and how much you can repay extra to optimize your debt. A specially developed wizard makes it easy for you: Step 1 – you select how often you are planning to make Extra Payments; Step 2 – the period of time, during which the payments are to be made, the default period equals to the whole amortization period, but you can specify your own time; Step 3 – the amount of each Extra Payment. You can see the display of the totals of the Additional Payments and the resulting Interest Savings update as you alter the amounts of the payments.