monthly mortgage payments and my principal balance

Some Mortgage borrower think that no matter what type of mortgage I have, as long as I continue to make monthly mortgage payments, my principal balance will fall every month. however, this statement is false

The Relationship between monthly  mortgage payments and my principal  balance

If you have a conventional mortgage, (a 15 - or 30 - year fixed rate product), your principal balance will fall every month because the product requires you to pay down both interest and principal each month and allows you to reduce (amortize) your loan amount.

That, however, is not necessarily the case with some of today’s nontraditional mortgage products such as option-ARMs and interest-onlys with teaser rates: your balance may not fall, and in some cases it may go up, even though you make all the required payments. This is called negative amortization; it can occur if you choose to make minimum monthly payments that typically cover only a part of the monthly interest owed and none of the principal for a certain period of time. The interest that is not paid is added to your principal balance. As a result, your loan balance increases and could exceed what you originally intended to borrow.

The lender should provide you with clear information about the benefits and risks of the products it offers so that you can make an informed decision.

What you should ask the mortgage lender

If the product permits negative amortization: (the loan balance can increase every month)

• May I have a repayment analysis that includes the initial loan amount plus any balance increase that may result from the negative amortization provision? If the lender suggests an option-ARM: (option to make minimum monthly payments OR interest only payments)

• What is the minimum monthly payment on the loan?

• If I make that payment, will my loan balance rise, fall, or stay the same?

• What effect will choosing minimum monthly payments have on how much of my home I actually own?

• What effect will choosing interest-only payments have on my loan balance and my home equity (the amount of my home I own)?

• When I start paying down the principal, as required, how would the dollar amount of my payments compare to that of a conventional mortgage lasting the same number of years?

If the lender suggests an interest-only mortgage: (allows you to pay only the interest and no principal for a set period of time)

• When my payments increase after the designated period (usually 3-5 years), will I still be able to afford my home?

• How does the interest rate on an interest-only compare to a conventional 15- or 30-year mortgage?

• When I start paying down the principal, as required, how will the dollar amount of my payments compare to that of a conventional mortgage lasting the same number of years?