Will making extra home mortgage payments help cut the principal?
Q : Would you please explain how making double home mortgage payments works to reduce the principal so I’ll pay less in the long run? — Stephanie
A : Sure! Let’s say you have these loan terms: $150,000 principal at 6% interest for 15 years. Your monthly payments are $1,265.78.
You are about to make your first monthly payment. If you asked for an amortization schedule, you know that payment will be allocated $750 to interest, and $515.78 to the principal.
After you make your first double payment, your new principal balance is $149,484.21, because the entire $1,265.78 of your second payment went toward reducing the principal balance or for “principal prepayment.”
Typically, the terms of a home mortgage allow you to make any amount of additional principal payment during the month once you have paid the payment and interest due.
It doesn’t have to be a full payment. (Don’t assume anything, though.
Check the terms of your mortgage.)
Just for fun, I ran the numbers with you making double payments every month using the example figures above. You might think that cuts everything in half. But the results are far more dramatic. You would pay that 15-year mortgage in six years, 11 months and slash the total interest you would have paid over 15 years ($77,841.93) to only $28,336.77. That’s the power of prepaying the principal.
I highly advise that when making a principal prepayment, you make two separate payments and write in the memo area of the second: “Principal prepayment only.” Then, trust but verify. Once the payments have been processed, check to make sure that second payment did in fact go in its entirety to reduce the principal balance.
Should you ever want to make several regularly scheduled interest-andprincipal payments ahead of time because you’ll be going out of the country or for some other reason you need to pay your bills in advance, be sure your mortgage company knows without any doubt that you are making your payments “ahead.” Otherwise, they could use them to prepay the principal, leaving your regular payments due while you are gone.
You don’t want to arrive home to a foreclosure notice.
Q : I am going to open a new checking account at a new bank to make my mortgage payment, among other
bills. However, I’m tired of getting “nickeled and dimed” to death with fees where I am now. What should I be looking for in a good checking account?
— Sylvia
A: Great question. Here’s the minimum you should expect from the bank: • No monthly fee. • A low required balance to maintain your
free checking.
• Free checks and check writing.
• Online access to your account statements for no fee.
• Free online bill pay for at least 15 transactions per month.
• FDIC insurance on your deposits (or NCUA if it’s a credit union).
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This column will answer questions of general interest, but letters cannot be answered individually.