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This is an oversimplified scenario (the numbers, dates and interest rate may not be accurate as I am only asking about the strategy):

  1. I have a mortgage with a monthly payment of $1,000 and it is due on the 1st of every month.
  2. There is no prepayment penalty.
  3. The interest rate is 4% and the loan is 30 years.
  4. On January 1st, I have a disposable fund of $1,000.

I am considering doing the following:

On January 1st, make the payment for January and February with this $1,000 disposable fund in addition to my normal mortgage payment. Now my next mortgage payment is due on March 1st. Then on February 1st, I pay $1,000 as the payment for March. On March 1st, I pay $1,000 as the payment for April, etc. I keep making the payment one month earlier than the due date until I need my $1,000. Then I will simply skip one month's payment and start making payment on the due date.

Is this a good strategy? Will it work as a "Demand Saving Deposit" which will generate 4% annual interest for me and I can get my money back any time? Does this strategy have any problems?

Edit: Many thanks for all the comments and answers. Let me add a bit more detail here. When I make a payment, my lender will let me specify what this payment is for (see the picture below)

Mortgage payment form input including radio button for whether the payment is for the monthly payment or for "other"

Now I have a monthly payment due Feb 1, 2022. If I make a monthly payment today, my next monthly payment will be due March 1, 2022. In fact, I have the option of making 2 monthly payments in advance now, if I have the money. I am wondering if the strategy mentioned above saves money on interest while allowing me still to have money flexible. I can also choose to make a payment towards the principal and I understand how it works, but my question is about making monthly payments early.

Here is what happened in April when I made my payment one month in advance: my principal balance was reduced on April 2, the effective date of my payment while the due date was May 1. I assume this means I can save money in interest.

Image showing the results of April's payment

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    wouldn't it be a good idea to talk to your mortgage provider to get a view rather than rely on comment from a public website where responders will be without being in possession of all the facts?
    – 24601
    Dec 15 '21 at 9:34
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    A typical mortgage doesn't work like this. You will owe a minimum payment (established when you start the mortgage) each month, regardless of how much additional you pay each month. Your minimum payment is split between interest (the amount that has accumulated against the outstanding principal since your last payment) and your principal. Any extra each month typically reduces the principal, reducing the amount of interest you'll owe each month (relative to your original amortization schedule) without changing your minimum due.
    – chepner
    Dec 15 '21 at 13:32
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    Early monthly payments typically just mean the lender holds on to the money until your payment is due, then applies the money near the actual due date to interest and principal, the same as if you had simply sent the payment closer to the due date. You are basically just giving them free use of your money until then.
    – chepner
    Dec 15 '21 at 14:43
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    @chepner, so this strategy actually works (in the sense that it saves money on interest while still allowing me to have access to my emergency fund)? Surely I do not claim the originality of this idea, but I have never heard it being recommended or even mentioned anywhere.
    – Zuriel
    Dec 15 '21 at 15:11
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    It's not just about what you can pay now. It's down to personal choice and ensuring you are able to continue to pay, should you not be paid for a month or some months. It's better, if nothing else for mental health and stress to have that safety net your side. Where you control it. Once you get to that stage, consider having any monthly excess paid in, as an end of month money check. But always try to have enough for rainy days i.e. job lose, need a plumber etc.
    – indofraiser
    Dec 16 '21 at 8:34
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It's not a bad idea, but it suggests a broader issue with your personal finances. This is assuming, per comments, that early payments are pushing out your next payment date and not applying to principal.

It would be better to get in the habit of having money in a savings account in your control that is used as a buffer instead of allowing someone else to hold your money. An immediate goal should be paying current months bills with prior month income, and a longer term goal is to have an emergency fund that can sustain you for at least several months.

Making extra mortgage principal payments is a good idea if you don't have something better to do with extra money (like establishing an emergency fund, or paying off higher interest debt). Some prefer to invest instead of paying off mortgage early, especially worth considering if your interest rate is low and you have not maxed out your tax-advantaged retirement contributions.

I'm not familiar with a mortgage approach where you'd save money by making monthly payments early, but if your lender is indeed applying your payment early there could be some interest savings. If you pay 30-days before it is due and they apply the payment immediately, then you'd save about 1/12 APR * principal portion of that month's payment. Say $500 of your payment is principal (no idea how far along in the mortgage you are), that's $1.67 you'd save. If you keep that up for the year ~$20 so if you don't have a way to earn 2% on $1000 then this is decent, and it does serve as a buffer so it makes sense as part of your emergency fund/plan. If they aren't applying the payment immediately and saving you any interest then better to do something else with the cash.

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    Thank you for your comment! I do not have any other debts and I actually have some emergency fund in my savings account. Now I am wondering if I can use $1000-2000 of this fund to "generate some interest" in the sense of saving interest on my mortgage with the flexibility of getting it back whenever I need it. Most investments have some risks, yet my "investment" should be risk-free.
    – Zuriel
    Dec 15 '21 at 15:44
  • Yes, I mean applying the payment say 30 days early. I understand that only the principal part of my payment will help save interest. Thank you for your clarification!
    – Zuriel
    Dec 15 '21 at 16:24
  • I tried to do this with a car loan a few years ago, and the only thing it might indicate is that I have a tendency to overoptimize my personal finances.
    – stannius
    Dec 15 '21 at 17:02
  • @Zuriel I think a more common way to do that is something like a bond ladder.
    – user3067860
    Dec 15 '21 at 18:45
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Unless you plan on skipping a payment in the future, you'll be better off paying extra to principal rather than "banking" a payment early. If you "bank" a payment early, I'm assuming (but could be wrong) that the payment will apply the same amount to principal and interest as if you have paid it on time. When you skip your payment, the previously "banked" payment will be applied and you will not get any late fees. But, your amortization schedule will not change.

If instead, you apply the extra payment to principal, then your principal is reduced more than the original amortization schedule planned for, which reduces your interest going forward. The "downside" to this is that you no longer have a "banked" payment that you can use to skip one in the future, but it works just like you had deposited that in a 4% savings account, except you can't "withdraw" it until you pay off the mortgage (which would be about a month early if you did not refinance).

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  • Thank you for the answer! Just to clarify: do you think my strategy will save money on interest, or just let my lender have my money early with no interest?
    – Zuriel
    Dec 15 '21 at 15:31
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    If you prepay principle, then yes it will save you interest (roughly the extra amount times your interest rate for the first year, then decreasing after that). Your payment amount will be the same, so that interest savings is realized in more equity in your home (that you can't get out until you sell or refinance)
    – D Stanley
    Dec 15 '21 at 16:06
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    buy are you continuing to make payments on their due date? If so, then in the end you're actually paying $1000 to principal since you'll have less accrued interest on the next scheduled payment.
    – D Stanley
    Dec 15 '21 at 16:21
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    In that scenario you may not save any interest - it depends on how the bank calculates the interest portion. Even if you could, you'd pay some interest back if you skip a payment since you'll get charged two months of interest when you start up again. If you want to get that $1000 back, then don't prepay. Just save it and forego the $3/month of interest savings
    – D Stanley
    Dec 15 '21 at 17:14
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    Think of it this way: you are never skipping a payment; there is always a payment due on the first of each month. You are just arranging matters so that there is a longer gap between when you submit the payment and when it is finally due.
    – chepner
    Dec 16 '21 at 16:38
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To expand on DStanley's answer - I like to tinker, to test ideas I have and to see how things work. I once did something that seems to confirm his answer 100%. I sent 3 months worth of mortgage payments to the bank. I specifically did not indicate this was prepaid principal, but actually sent in 3 payment coupons. One might do this if taking an extended trip. At month 4, I checked my balance and noted it was precisely what was indicated on the amortization table I printed, i.e. the same as if I made the payments on time.

It seems, oddly enough, that for this type of loan, the bank has no obligation to credit the account for daily interest owed or saved. An early payment, no matter how early, saves you no interest, while a payment up to X days (usually 15?) won't incur a late charge.

For a time, I had a home equity loan, an odd product that had no new borrowing power, a higher rate, but zero closing costs. This served me well when rates were still dropping fast, but I wasn't ready to call the bottom. This let me drop from 6.5% to 5% for free, while the 30 year fixed was near 4%. The breakeven on closing costs was over 2 years on that regular mortgage, and it didn't make sense to do it then.

This loan acted exactly as you suggested. i.e. payments credited the day they hit. A "prepayment" a month ahead advanced the due date of the next payment and also saw a savings when comparing the balance at month 3 to the original amortization.

To summarize - In the US, regular mortgages do not work as you'd like, but the home equity loan (not HELOC) seems to work exactly that way.

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    It may vary by lender. I have had two car loans in my life. The first worked as per OP's scheme: early payments both lowered the accrued interest and pushed the payment due date out. The second, early payments only lowered the interest, and never pushed the due date further than a month out. Mortgages are more regulated than auto loans but there may be enough wiggle room in the regulations to allow banks to choose one or the other.
    – stannius
    Dec 16 '21 at 15:56
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    My US credit union allows this, though they went to a 3 month max payment push because it became hard for them to figure it out or something. I was 3 years ahead on my mortgage, and could have stopped paying altogether for 3 years if they didn't recently impose this. But definitely read the contract and ask questions. Some loans will treat it as a regular payment while others, like my CU, will apply the payment to whatever pending interest there is and apply the rest to principal the day of receipt.
    – ps2goat
    Dec 16 '21 at 21:02
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Is it a good idea to make one additional monthly payment to a mortgage?

If this action does not change the amortization schedule then there is no financial gain.

It would be wiser to start an emergency fund in a separate savings account and add the $1,000 every year, or preferably $75-100/month, until you've reached a comfortable emergency fund.

This way you'll actually achieve financial responsibility instead of giving yourself the illusion of it.

If you already have an emergency fund then apply $1,000 against the mortgage principal.

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