This is an oversimplified scenario (the numbers, dates and interest rate may not be accurate as I am only asking about the strategy):
- I have a mortgage with a monthly payment of $1,000 and it is due on the 1st of every month.
- There is no prepayment penalty.
- The interest rate is 4% and the loan is 30 years.
- 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)
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.