Reducing the loan balance by additional principal payment

Sam

A borrower often makes an additional payment towards the principal loan amount in order to reduce the latter. This sum of money is known as the additional principal payment.

In case of a fixed rate conventional mortgage, the principal loan amount is reduced by additional payments towards the principal. But this does not lower the required monthly payment that includes both principal and interest.

Additional principal payments reduce the outstanding loan balance thereby lowering the monthly interest expenses. The payment remains the same with the amount towards the principal increasing while the total interest payment gets reduced.

The table given below shows a comparison with a 15 year fixed rate mortgage with no additional principal payment, and a mortgage where a small amount is added to each monthly loan payment.

Let the total loan amount is $200,000 and the interest rate be 7%.

15 year Fixed Rate Mortgage	No additional payment	With monthly additional principal payment of $ 50
Monthly Payment	$ 1,797.66	$ 1,847.66
Total payment	$ 199,369.01	$ 199,319.01
Total Interest	$ 123,578.18	$ 117,070.02
Loan period (In Months)	180	172

As per the example given above, paying an extra $50 per month would shorten the loan period by 8 months and save more than $6,500 in interest payments.

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