Applying your mortgage escrow account overage towards your loan principal will help pay off your mortgage and lower your interest payments.
Q: I have a $2,000 overage on my mortgage escrow account. Should I let the lender apply the cash to the next 12 payments equally over the next year or get a refund and make an extra $2,000 payment on my next monthly payment? Which would be better for me?
A: If you are looking to pay down your mortgage debt, you are better off having the lender apply the full $2,000 towards the principal on your loan. Due to the power of compounding interest, a payment made earlier has a much larger impact than equal payments made over time.
Think about it this way, if you had a choice to make an extra payment on your loan at the beginning of the year or at the end of the year, you are better off making that payment in January. If your balance on January 1 is $100,000, and you make a prepayment in that month of $1,000, your balance as of February 1 has gone down to $99,000. You will pay interest on a $99,000 loan and apply more of your monthly payments towards principal reductions.
However, if you make that extra payment at the end of the year or a little at a time, you will end up paying a tad more in interest.
Now, you need to make sure that the overage in your mortgage escrow account is accurate. We wouldn’t want you to spend that money – even if you intend on applying it to the repayment on the principal on the mortgage – to find out that the lender made a mistake. Once you make the prepayment, you can’t get that money back. Go over the statement, make sure that the lender applied the funds properly, that the right amount was paid for real estate taxes and insurance. Only then should you decide to apply the excess funds towards the principal on the loan.
Once you are certain the information is correct, you can see if the lender can directly transfer the payment and apply it to the principal on the loan. If you can apply it faster, it will work harder for you and benefit you more over the long term.
We also have to assume you have sufficient other funds to pay for your living expenses and this extra $2,000 won’t be needed in the near future.