How to pay more principal on home loan?

Question

This is how I pay off my current loan for my condo.

Principal and interest - $1,867.27
Escrow payment - $776.63
Total monthly payment - $2,643.90

When I go and look at the transaction detail. This is how I see my payment applied.

Payment - $2,643.90
Principal - $632.42
Interest - $1,234.85
Escrow - $776.63

As you can see my Principal is only $632 where the payment towards interest is higher.

Do you think it is a good idea to pay additional amount towards my Principal as well ?

Thanks Ved

Answer 1

The prime question is can you afford to pay a higher amount? Pay more than the minimum will pay the loan off quicker but there are two near term implications:

• Your monthly expenses just went up. The good news is that if you have a big expense, like braces, in the future you can stop making the extra payment. Then resume them when you have more money available.
• It will impact your taxes. Because your interest expenses will be decreasing quicker than expected, the amount of interest you deduct will also decrease. That might not be a big impact, but you should be aware of it when doing your withholding calculations.

Remember that the extra payments don't work like a bank account. It takes months/years off the length of the loan. It doesn't let you skip a payment. You can't ask for the extra money back, they would call that a home equity loan.

If you decide to do it, make sure the payment is really paying off principal, and not treated as an early payment. Most people do this by paying with an extra check/transfer and specifying that it should reduce principal.

Don't pay anybody/company to setup a biweekly payment plan for you. It does get you 13 monthly payments a year, but you can do this without their help. In some cases they have turned out to be a scam, who pocketed payments and caused defaults.

Answer 2

The missing pieces to this puzzle -

• Do you have any higher interest debt? If so, pay it first.
• Does your company have matching retirement funds (I'm thinking 401(k) but you have not tagged 'US')? Deposit at least to the match before prepaying any other debt.
• You set with other savings? Emergency fund, any other irregular expenses, etc.
• Is the rate on the mortgage an acceptable return?

The last point is this - paying one's mortgage early is "investing at the rate of the mortgage, fixed, guaranteed." So, my decision to pay off my 3.5% loan is nearly the same as to invest in a 3.5% CD. (Except the liquidity is a bit different, you send the bank an extra $1000, you're not getting it back.)

The postscript - the ratio of interest to principal is meaningless. At the beginning of a loan it will be a much larger ratio of interest to principal, at 4%, about 70% of the payment is interest on a 30 year amortization. Some innumerate folk will say 700(interest)/$300(principal) = 233% rate. This is nonsense, it's just the nature of paying the loan off. After the priorities above, pay more if you wish.

Answer 3

If you can afford to make the extra payment do the following:

1. Write a check for your NORMAL payment amount, mail it in.
2. Wait a couple of days, mail a second check with FOR PRINCIPAL ONLY in the memo line.

If you pay using some online system, you may have to check with your bank on how to designate the additional transfer as FOR PRINCIPAL ONLY.