This is a common question worth some extra explanation.
YES - The extra payment will only reduce your principal and shorten your
loan term,
NO - but it will NOT reduce your monthly interest (which is still based on
your full principal without reducing by your extra payment).
This is a common misconception that extra payments (such as changing monthly
payment to biweekly payment) will reduce the monthly interest. Most
mortgage service companies use the original amortization schedule to collect
your monthly payment which is based on your loan amount and loan term. The
amortization schedule and the monthly payment are fixed (unless ARM), and
your interest won't get reduced based on your extra payment from last month/
year/decade, not considering your escrow account. You extra payment is just
like a 0% interest saving in your mortgage company until your principal
amount reaches 0.
For example, your have a 15-year fixed mortgage with 180 payments. If you
want to pay extra, see 25% more monthly (125% monthly payment) for 12-year
payoff plan. The end results will be exactly the SAME for the following two
scenarios: (1) you pay 125% monthly payment for 12 years (1.25 * 12 * 12
= 180), or (2) you pay 100% monthly payment for 12 years and save 25% extra
payment in a bank saving account (!! NOT touching it !!), then send a large
extra payment (do NOT including any interests you have earned for these
years) at end of 12 years to pay off your mortgage. Your total payment
amounts are the same, but you have something left in the second scenario.
Now, you see why mortgage companies LOVE you to pay extra monthly. Free
money for them, not you.
Of course, there are some benefits, like keeping your hands off the extra
saving. Now it's up to you to choose which way you want to go.
