Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays Bank.
I recently received the following question from a reader named Merry that’s interested in paying off her mortgage early.
I have been making an extra regular mortgage payment in the middle of every month. Currently, my next mortgage payment is not due until May 1, 2010. Is this the best way to put extra money toward my mortgage, or should I be specifying the extra money to go toward principal only?
The short answer is that this is not the best way to prepay your mortgage. In fact, all that’s happening here is that the bank is treating these like ‘regular’ payments that got sent in early. Instead of applying the overage to the mortgage principal, they’re holding the money (and pocketing the interest) until the monthly payments are due.
If it were me, I’d call the bank and politely (but firmly) insist that they go back and apply the payments properly. If they refuse, then I’d stop sending in the ‘regular’ monthly payments until they are due (May 2010), and instead focus on principal-only payments along with a note specifying how these funds are to be applied.
As an aside, I’ve never had a problem with a mortgage lender properly applying over-payments to the mortgage principal. In fact, I’ve never even enclosed a note asking them to do so. I’ve just written a larger then necessary check and they’ve taken care of things on their end.
Note that Merry has been “making an extra regular mortgage payment” every month. It’s thus possible that, when the bank received a standalone payment that exactly matched the expected monthly amount, they inadvertently applied it as a regular payment. Either way, it’s definitely worth calling to get it straightened out.
If you are interested in prepaying your mortgage, you can tinker with a mortgage prepayment calculator to determine the impact extra payments would have on your loan and loan term. You can also compare mortgage rates to determine if you can save money over the course of your loan by refinancing to a lower rate – 30 year fixed mortgage rates are averaging 5.11% this week, according to MoneyRates.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math (693)
- Dish Network Customer Service SUCKS (536)
- $8,000 Homebuyer Tax Credit (429)
- Pay Off Mortgage Early or Invest? (424)
- How to Claim the First-Time Homebuyer Tax Credit (352)
- Termite Control: Sentricon vs. Termidor (329)
- How Much Should You Pay a Babysitter? (288)
- Ethanol Blended Gas = Lower Mileage? (272)
- Reduced Credit Limits? Share Your Experience (256)
- $15,000 Homebuyer Tax Credit (242)
- Buying Furniture off the Back of a Truck (237)
- Will Mac OS X Lion Kill Quicken 2007? (191)