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I am applying for 30 year term, 7/1 ARM with 10 year interest only loan. This is what I received from my lender:

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My question:

  1. During interest only period, if I make partial prepayments, does it reduces principal amount?
  2. During interest + principal period (after 10 year in this case), if I make partial prepayment, does it reduces principal ?

My understanding is any additional prepayments, during the term of loan should reduce principal . Is this correct ?

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During interest only period, if I make partial prepayments, does it reduces principal amount?

It doesn't explicitly state that, but that's what it seems is happening, yes. That's why it says that it reduces the interest amount - because the amount of principal changes.

For example, if you borrowed 100k at 6% annually with monthly payments, that's 0.5% per month, or $500 per month (100k * 0.5%).

If you make an extra $1k payment, your principal is now $99k and your monthly interest payment is now $495 per month (99k * 0.5%)

It's possible that the total amount of interest is precomputed for 10 years, and any prepayment goes to that total interest amount, reducing the rest of the interest that's owed, but I've never seen a mortgage that does that, only predatory car loans.

During interest + principal period (after 10 year in this case), if I make partial prepayment, does it reduces principal ?

Yes, but in this case it changes the proportion or principal to interest in future payments.

Say you again borrowed $100k at 6% but now are in the repayment period, and your monthly payment is $716 per month (which would be the payment on a 20-year loan at 6%). Right now, let's say that you've been paying for a year and your $716 per month is broken down into $488 of interest and $228 of principal. If you then prepay $1,000, the monthly payment does not change, but you'll pay less interest per month (since the outstanding principal is lower) and more of your payment will go towards principal, which means that you'll pay off the loan more quickly.

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I don't think there's enough information in the quoted excerpt to answer your question. The excerpt might only apply to prepayments that arrive without instructions to the lender.

The question you might ask is, "with this loan/lender can I make principal-only prepayments if I mark them as such?"

According to this article, not all mortgage lenders allow principal-only prepayments.

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