Paying USD 1000 towards the principal on my mortgage

Question

1. I bought a home worth 200,000 paid 20% down, my interest rate is 4%, 30 yr fixed
2. Remaining Loan 160,000.
3. Initially, lets say I pay around 1000 USD (200 toward my principal and 800 towards my interest).(May not be accurate numbers)
4. Now the balance left on my mortgage is 159,000.

If I pay additional 1000 USD towards my principal after paying my balance due this month, Starting next month when I have make my mortgage payment, would I be paying interest on 159,000 or 158,000.

I realized through internet that the additional payments would only cut the down the 30yr term. That is, instead of paying for 30 years, I might be paying for 29 years 11 months. But there would no change in the interest calculation.

Is that true? Appreciate your thoughts in advance.

Answer 1

Initially, lets say I pay around 1000 USD (200 toward my principal and 800 towards my interest).(May not be accurate numbers)

Now the balance left on my mortgage is 159,000.

This is incorrect. Your balance is now $160,000 - $200 = $159,800.

I realized through internet that the additional payments would only cut the down the 30yr term. That is, instead of paying for 30 years, I might be paying for 29 years 11 months. But there would no change in the interest calculation.

Is that true?

No.

Every month, you'll pay less on interest, and more against principal, even if you never make extra payments.

Let's use some real numbers: $160,000 mortgage at 4% for 20 years. Your monthly payment is $970, and $533 of that goes to interest. Thus, $437 went to the principal.

So, after one payment, your balance due is $160,000 - 437 = $159,563.

In the second month, you'd still owe $970, but the interest payment would be $532, a reduction of $1, and $438 towards the principal.

Your balance is now $159,563 - 438 = $159,125.

Notice how the portion devoted to interest decreased because the principal decreased.

If you now made an extra $1000 payment (and informed the mortgage company that it was to go towards the principal), your balance would be $159,125 - $1000 = $158,125.

Thus, in your third $970 payment, $527 goes to interest and $443 to the principal.