Can You Choose How the Mortgage Payment Is Divided?

August 7, 2006, Reviewed July 11, 2007,  May 1, 2011

"On my mortgage, I pay only part of the interest, with the unpaid portion added to the balance. If I have extra cash, how should I apply it, to the interest or to the principal."

You don’t have that option, in fact, no mortgage borrower does. The allocation of a mortgage payment between interest and principal is determined mechanically from the definitions of "interest" and "principal".

Interest is the amount the lender is due for the period covered, usually a month, and is calculated from the interest rate and the loan balance. For example, if the loan is for $100,000 and the rate is 6%, the monthly rate of .5% is multiplied by $100,000 to get $500 of interest due.

Principal is the payment minus the interest, and it is also equal to the change in the loan balance. If the borrower pays $600, for example, then $500 is interest and $100 is principal. The balance is reduced by $100, which is called "amortization". If the borrower pays $400, the principal is -$100 and the balance rises by $100, referred to as "negative amortization". See How Does Negative Amortization on a Mortgage Work?

In your case, the payment doesn’t cover the interest, let’s say it is $300, which means that the principal payment is -$200. If you find another $400 to add to the payment, it would raise the total payment to $700, of which $500 would go to interest and $200 to principal. There is no discretion involved. There never is.

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