If I make a substantial payment to my house loan is it best to go towards the principal or the interest part ?

Question

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Answer 1

PRINCIPAL!!!

Answer 2

If you plan on continuing to pay your mortgage regularly aside from this payment then put it towards principal.  Then you are not longer charged interest on the principal portion that you just paid off.

Answer 3

You probably won't have a choice.  The bank will apply as much as they can to the current outstanding interest and the rest goes to principal.

So if your typical monthly payment is $1,000 odds are at least $800 goes towards interest.

If you pay $10,000 the same $800 goes towards interest, but the remaining $9,200 will pay down the principal... therefore decreasing the amount left to pay off your loan.

This will also decrease your future interest payments since interest is based on the current principal amount.  In other words, now only $750 of that $1,000 monthly payment goes to interest, the remainder will pay down the principal.

Answer 4

if you are current on your mortgage and the rate is in the normal range, the smarter decision is usually to invest the money you would have spent on the extra mortgage payment.  This is only true if you have taxable income and you can find a safe investment that pays more interest than your home mortgage rate less the marginal rate of income tax you pay.

Marginal rate is the percent the last dollar you earned was taxed.  Its a good enough proxy for the impact in real terms of what mortgage money really costs you.  

If your home mortgage is 8%, and your income is taxed at a combined 25% state and federal on the last dollars you earn, then the "hurdle rate" would be 6%.  That is, you are really only saving 6% by prepaying your mortgage, because you get to deduct the interest from your state and federal taxes.

So, if you can find an investment that you feel is safe enough that beats 6% in this example, you would make the investment, vs prepay the mortgage.

Right now a 30 year fixed rate mortgage is about 6.5%, and your marginal tax rate for combined state and federal taxes could be as much as 35% or so.   So you multiply your mortgage rate times 1-the tax rate or 65%  6.5% times .65 is 4.23% so any investment that beats 4.23% is better than prepaying your mortgage in that example

Answer 5

My gosh principle, if you make just one extra payment a year and apply toward principle it will knock between 5-7 years off your payment, your payment will be the same but more of your payment will go to principle in turn knocking time off your loan. But you must put apply to principle on that check or they will probly put it on interest and that doesnt help.