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Question:


When I send an extra payment for my mortgage, will it go towards the principal only?
-MontanaJoe


Answer:


Yes. It has to go toward your principal for one simple reason: Your regular payment for the month includes the interest that has accrued on the unpaid balance during the previous month plus some principal. Once you’ve made that payment, there’s no more interest to pay, so any extra payment goes entirely to reducing your principal. The real question you should be asking is whether you should make extra payments. The correct answer depends on what else you could be doing with the money.
 
If you’ve got a 5 percent mortgage and an outstanding balance on your credit card on which you’re being charged, say, 12 percent, you’ll be better off paying down the balance on the card. Assuming you’ve already made at least your minimum payment for the month, then any additional payment on the card will go entirely to reducing the amount you owe, just as with the mortgage. Because the rate on the card is higher, you’ll save more in interest each month thereafter, all else being equal.
-Conrad de Aenlle



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