My Mortgage Payment Is Still High

Couple Signing Contract
••• Rob Daly / Getty Images

What happens to your mortgage payment if you make a large lump-sum payment?

Paying down your debt early is often a great idea. However, things might not work out exactly as you expect them to if you put this payment toward your mortgage in one lump sum. Before you send funds, learn how extra payments affect the following:

Key Takeaways

  • Making a large early payment on your mortgage will reduce the amount of interest you pay on your loan.
  • However, making a lump-sum payment to your mortgage will not necessarily lower your monthly payments.
  • Sometimes, you have to request a recalculation and pay a fee; this process is called “recasting a mortgage.”
  • If you have an interest-only mortgage, the odds are better that your monthly payment will automatically be reduced.

Interest Costs

Making a large early payment on your mortgage will reduce the amount of interest you pay on your loan. You’ll have a smaller loan balance, and interest is charged against your loan balance, so you’ll pay less. Over many years, this will result in significant savings—especially if you’re in the early years of a long-term loan like a 30-year mortgage. With amortizing loans (or loans that you pay down over time with fixed payments), most of each monthly payment goes toward interest costs. Gradually, more and more goes toward principal repayment.

To figure out exactly how much you’ll save, you might need to do a bit of math. But the math isn’t horrible (a computer will do all of the heavy lifting), and it’s helpful to understand how your loan works and how you can save money. If you model your loan on a spreadsheet, you’ll see how the loan works: your monthly payment, monthly interest costs, and shrinking loan balance. Simply reduce the loan balance at some point in the spreadsheet that corresponds with where you are today.

For example, if you owe $100,000 and are thinking of paying $20,000, to reduce your loan balance to $80,000, the spreadsheet should automatically re-calculate the rest of the loan for you, and you should see reduced interest costs.

Time To Repay

Most mortgages are 15-year or 30-year fixed-rate mortgages, with a 30-year mortgage being the most popular. Over that period, you’ll slowly pay down your loan balance. However, you can always speed things up as long as there’s no prepayment penalty (a fee you must pay if your loan is paid off before its term).

If you make a lump-sum payment and don’t recast the loan (see below), you’ll pay off the loan more quickly and save money on interest. Those monthly payments will simply end sooner, so you can put those funds toward other goals. Again, using the calculations linked to above, you can run the numbers, and you’ll see that the loan just ends early.

The Monthly Payment

If your main goal of making a lump-sum payment is to lower your monthly payment, then you might be in luck. But mortgage companies don’t necessarily adjust your payment when you pay extra–sometimes you have to request a recalculation and pay a fee. This process is known as recasting a mortgage.

Some people are disappointed after they send huge payments to their mortgage lender, only to find that the required monthly payment has not changed. Be sure to ask your lender what is required in order to adjust your monthly payment.

If you have an interest-only mortgage, the odds are better that your monthly payment will automatically be reduced. After all, your payment is based solely on the amount of the loan (which never changes unless you pay extra). However, even interest-only loans don’t always adjust immediately, so call and ask how things work if it’s important to you.

Frequently Asked Questions (FAQs)

How do I make a lump-sum payment on my mortgage?

You can usually make an extra payment toward your mortgage at any time. If you pay online, you'll usually find an option to include extra for principal only with your regular payment. Similarly, if you pay by check, you should be able to denote an extra payment on your monthly payment stub.

How much sooner will my mortgage be paid if I make a lump-sum payment?

That depends on how much of an extra payment you make and how early in the life of your loan you make it. An extra $1,000 in the first year of a 30-year mortgage could shave several years off your loan, but that same amount with only a year left won't have nearly the same impact. That's because the earlier lump-sum payment will reduce the total interest you pay over the entire life of your loan and enable you to pay down the principal more quickly.

Is it a good idea to make a lump-sum payment on your mortgage?

To decide whether you should make a lump-sum payment on your mortgage, you need to weigh the benefits of paying your mortgage faster against what you could do with that money if you don't put it into your home. The long-term savings from a lump-sum payment could be significant, but you may also need to forego doing other household projects, paying down debt, or saving money in order to pay extra on your mortgage. Consider the total costs and benefits of each option.