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I am planning to purchase a home and all calculations and the banks say principal, interest, property tax, plus mortgage insurance will be close to $1000 per month.

The calculator show that if I increase my down payment by $10,000, then my monthly payment goes down by $200 per month. Based on that, if I suddenly were to come into $10,000, and apply that to the home loan, would the monthly payment similarly reduce my monthly payment by $200 per month. Over time, would the monthly payment amount slowly reach $0 per month?

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    Mortgages and car loans are very similar, and in neither case do extra payments reduce the amount monthly payment. What change are #1 the amounts applied to interest and to the principal, and #2 the number of months remaining on the loan.
    – RonJohn
    Commented Nov 15, 2019 at 15:49
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    @Village - you may get more specific and detailed responses if you let us know where you are located.
    – dwizum
    Commented Nov 15, 2019 at 18:08
  • I'm assuming US context. Pay attention to the PMI- once the loan balance is down to 78%, you can demand that the bank remove it from your monthly payment (and the money goes toward principal instead.)
    – Brian Borchers
    Commented Nov 16, 2019 at 16:43

8 Answers 8

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The typical home mortgage is amortized to give you a consistent payment amount through the duration of the loan. What you'll see is that each month a greater portion of your payment goes to principal rather than interest. When looking at loan calculators look for ones that show the full amortization schedule to get a good picture of how the variables interact over the life of your loan.

If you pay extra some months, that just decreases the number of months you have to pay, rather than decreasing the monthly payment amount.

I don't think it's common anymore, but there can be pre-payment penalties with some loans, so watch out for that.

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    Just as an FYI, prepayment penalties on mortgages were largely eradicated by regulation after the crisis a decade ago. Even on those loans that are allowed to have penalties, the penalties are heavily restricted in amount and duration (they have to roll off within 3 years of the loan being written). Most lenders just build prepay risk into their pricing models now instead of actually having penalties. Unfortunately, this means we all basically pay the cost of those people who do prepay, but at least it's spread out to the point where it's a minuscule factor.
    – dwizum
    Commented Nov 15, 2019 at 15:49
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    @dwizum prepayment penalties were eliminated from the Fannie Mae/Freddie Mac uniform mortgage instrument (the most common "conforming mortgage" type) in the Carter administration, and the overall uniform commoditization of loans has a historical benefit estimated at 0.5 to 1% lower rate for consumers. scholarship.law.missouri.edu/cgi/…
    – user662852
    Commented Nov 15, 2019 at 16:28
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    @dwizum Good note, I'm not sure which country the OP is located in so left the pre-payment penalty portion purposely vague.
    – Hart CO
    Commented Nov 15, 2019 at 16:39
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    Though note that if your taxes and insurance are paid by the mortgage lender through an escrow program (as is fairly common), the total payment will probably increase a bit over time, even though the principal+interest remains the same.
    – jamesqf
    Commented Nov 15, 2019 at 17:00
  • @HartCO - good point, I commented on the question asking the OP to clarify their location.
    – dwizum
    Commented Nov 15, 2019 at 18:09
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Not typically. The payment amount on a mortgage is typically fixed until the principal balance is paid off. If you make extra payments after origination, that payment reduces the amount of principal remaining, which reduces the amount of interest that is charged, which means that more of the fixed payment goes to principal, paying off the loan sooner.

You would likely have to refinance the mortgage into a new loan to reduce the payment amount, but the fees associated with that will probably be more than you'd save in interest. (And there's no guarantee that you'd get the same or better interest rate on the new loan)

That said, if you use a local bank or credit union, they might have more flexibility to change the terms of the loan in the middle, but it would be unusual.

There are also special cases, like "prepaid interest" loans, where the total amount (including all interest) is fixed and the loan is not paid off until all of the principal and interest based on the original amortization. But these are more common for high-credit-risk car loans. I have never seen one on a mortgage.

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Generally no.

Mortgage loans are typically amortized up front, with a fixed payment every month. The proportion of that payment that applies to interest vs principal changes every month (more interest at first, when there is more outstanding balance) but the payment stays the same every month.

If you pay "extra" and it is applied to principal, the lender will generally keep the payment fixed anyways. The end result is that the number of payments you have to make is decreased - essentially, paying more principal in a specific month reduces your outstanding balance, so the ratio of future payments is shifted more towards principal and less towards interest.

You can, in some cases, ask a lender to "refactor" a loan, which basically means that they re-run the calculation that determines what the payment is, based on the outstanding balance and remaining term. However, some lenders won't do this without refinancing (underwriting the loan), and those that will refactor will usually only allow it once or twice.

If your ultimate goal is to pay as little interest as possible, then paying extra principal upfront, early in the loan, makes a lot of sense. But if your goal is to have as low of a payment as possible, it makes more sense to save up ahead of time and make a bigger downpayment. Or, if you come across a pile of cash after the loan is written, ask for it to be refactored or refinance as appropriate.

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Generally it depends. At least in europe bank offer 2 types of credits and mortgages:

  • Fixed payment
  • Fixed return on capital.

In the first, the absolute payment is fixed and over time more and more of the capital goes towards paying back the principal.

In the second, the rturn on principal is fixed and over time the monthyl payment (which includes return on principal + interest) gets lower.

GENERALLY - particularly for mortgages -the first is way more used because the payment tends to become smaller ANYWAY as part of the income. First, people tend to get promotions over 10+ years, and second inflation means that their wages rise anyway - and the constant monthly payment makes a smaller and smaller part of the budget over large timeframes.

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This answer applies to the US. This may be different in other countries.

Like the other answers have mentioned, over a typical fixed mortgage, the payment amount stays the same for the life of the loan.

In a normal fixed rate mortgage, if you make a large payment towards your mortgage, you are shortening the amount of time you will make payments and this reduces the amount of interest you will pay.

If you want to reduce your payment after making a large equity payment you have two options. Please note that both options below will likely end up with paying more interest than just keeping the loan as is.

Refinancing

This gets you a new interest rate and starts your loan over again. For example, if you started with a 15 year loan and then after 5 years refinanced to another 15 year loan, you would have 15 years before it will be paid off. The costs for refinancing can be high so this is not something you will want to do regularly. When the interest rates are better than your current loan, or when you are shortening the loan term and lowering the interest rate, this can be an attractive option.

Recasting

After making a large equity payment (your $10,000 for example) some lenders will let you reset your monthly payment to be lower, but your interest rate does not change and the payoff date of the original mortgage would stay the same. In this case you are trading getting your loan paid off sooner for a lower monthly payment (and additional interest). Typically the fees are much lower than refinancing since there is not as much work required for the lender. This option is less common since some lenders may not offer this.

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This may depend on where you are and what type of mortgage you have, because most of the answers so far contradict my direct experience!

I have a pretty standard repayment mortgage with a building society in the UK.  When I made a big overpayment, I was told that they'd automatically reduce my monthly payments to keep the term the same; but I could (and did) ask instead for the term to be reduced to keep the monthly payments the same.

I don't know how widely-applicable my experience is, but at least in some cases, you do have a choice; and keeping the term constant seems to be the more standard response.

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This needs to be negotiated with the lender.

Consider this: you get one 10000 USD loan with 200 USD monthly payment and another 40000 USD loan with 800 USD monthly payment with equal lengths. Then if you pay 10000 USD for the 10000 USD loan, obviously it will vanish so your monthly payments do really get reduced by 200 USD.

However, if you have only one 50000 USD loan, and suddenly have 10000 USD you want to use to reduce the loan, any of these could be true:

  • Loan length will be reduced with monthly payments being the same
  • Monthly payment will be reduced with loan length being the same

Do note that you always have option for refinancing your loan. So, if you suddenly have 10000 USD, you can take a new 40000 USD loan with different terms and use the 40000 USD + 10000 USD to pay back your 50000 USD loan. So, if you really want to reduce your monthly payment instead of loan length and the bank won't agree, you can explain this option of refinancing the loan to the bank. I'm sure they will agree later.

And one more important thing to remember. Loans with a fixed or long interest rate can't always be paid back without extra penalties!

The important think from bank's perspective about fixed or long rate loans is that they invested 50000 USD into a financial instrument that yields let's say 4%. If that's a 10-year bullet loan (assuming for simplicity), they will have 1.04^10 * 50000 = 74012.21 USD at the end of the loan period. Now if the market rates reduce to 2%, of course you want to take a new loan with 2% rate to pay back the old loan with it. If you do that, the bank would have only 1.02^10*50000 = 60949.72 USD. The bank just lost 13062.49 USD.

The only way to stop reducing interest rates from acting as a one-way clutch to reduce the bank's profit is to forbid paying back fixed/long-rate loans in conditions where the market rates are reduced, unless you pay also what the bank loses in the process of paying back the loan.

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Unless you refinance, making a large lump sum pre-payment won't alter the monthly payment amount. The effect it will have is to shorten the term, so the mortgage gets paid off sooner. Because the pre-payment goes directly to principal, the interest portion of each payment will go down (less principal to attract interest each month), so the principal portion will go up (the balance of each payment). This shortens the term both because you have less principal to pay off in the remaining payments, and because the principal portion of each payment has increased. Importantly, it has the effect of reducing the total interest you end up paying because you are carrying less money for less time.

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