Q: I have heard many times about how beneficial it is to make extra payments to my mortgage. My monthly payment is $748. This includes my escrow (property tax and insurance)
When you refer to making an extra payment does this mean everything $748 or just the mortgage which includes principal and interest $525?
A: When you make an extra payment on your mortgage, it’s typically just the principal and interest. In your case, if you make two extra payments on the $748 amount, it simply means that you’re making three extra payments of principal and interest per year.
That’s one way to pay off your loan much more quickly. Just remember, that you should always indicate on your payment coupon if you are trying to make an extra payment that should be applied against the loan.
For homeowners who have escrow accounts, extra payments can mysteriously be placed into the escrow accounts and moneys there will do you no good.
If you pay one extra loan payment – that is the amount you owe in principal and interest payments – at the beginning of your anniversary of your loan, you can shorten the life of your loan by around twelve years on a 30-year fixed rate interest loan. The more you pay off in the earlier years of a loan the more you shorten the number of years that you will have the loan.
If you do make an extra payment to your loan and that payment includes what you ordinarily pay for real estate taxes and insurance, you will be that much better off in the long run.
Recently I received a letter from a reader who believes that homeowners should not pay down their mortgage debt. Instead, he thinks they should invest their money in the stock market.
I’ve heard both sides of this argument for years. While the reader may be right about investing in the stock market, that’s only true if you are able to invest your money and your return is greater than your mortgage interest rate
The thing is, for many people, the idea of being debt free earlier in life is a source of great joy; it also gives them the ability to build equity in their homes and, to some degree, protects them against poor investments in the stock market and the volatile nature of the equity markets.
In other words, different strokes for different folks.
A consideration not usually mentioned in discussions about reducing the length of mortgages is the effect of inflation. A 30 yr mortgage may have significantly greater total payments over the life of the loan, but each payment is made with less valuable money in real terms. If one believes in probable greater future inflation for extended periods wouldn’t it make sense to take the longest mortgage you can get and refinance it when it is partially paid off?