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.