Mortgage prepayment: reduce the term or the payment?
Compare shortening a mortgage with lowering its monthly payment after an early principal payment.
An early principal payment may be used in two ways. Keeping the scheduled payment and shortening the term generally maximizes interest savings. Recalculating a lower payment while retaining the term improves monthly cash flow but usually saves less interest.
For example, adding $2,000 each month to a $2,000,000, 9%, 20-year mortgage reduces the modeled term from 240 to 186 months when the base payment is maintained.
The right choice depends on cash reserves, income stability and other debts. Before paying, obtain written answers on prepayment fees, minimum amounts, allocation to principal, whether the lender recasts automatically and when the new schedule becomes effective.
The mortgage calculator models the keep-payment/reduce-term approach. A lender’s lower-payment option requires its own revised schedule.