Extra mortgage payment a year whittles nicely at a home's cost

Be sure lender knows you want it applied to the principal

Dollars & Sense

January 28, 2001|By Neil Downing | Neil Downing,PROVIDENCE JOURNAL

I've been told that if I pay an additional mortgage payment every year, that would greatly reduce the length of time I'd be paying my mortgage. I was also told that it should be in January. Also, if I pay that extra [amount], should it just be applied as a regular [payment] or should I indicate that I want the full amount to go toward the principal or toward the interest?

Making just one extra payment a year on your mortgage loan can sharply reduce the length of the loan, notes Keith T. Gumbinger, vice president of HSH Associates of Butler, N.J., a publisher of mortgage information.

Suppose you borrow $100,000 over 30 years at a fixed interest rate of 8 percent. Your monthly payment of principal and interest would total about $734.

If you made one extra payment a year of $734 on your mortgage, you'd cut the length of the loan by about seven years, to a little less than 23 years, Gumbinger says.

You'd also save on interest. Without making the extra payment in this example, you'd wind up paying a total of about $164,155 in interest over the 30-year life of the loan.

By making the extra payment, you'd end up paying about $117,859 in interest over about 23 years, he says. So you'd save yourself about $46,296 in interest.

By following this strategy, you'd get out from under your loan a lot sooner, and you'd save money.

As for your other questions:

You generally don't need to make the extra payment at a particular time of the year. If you have an adjustable-rate mortgage loan, however, make the extra payment a couple of months or so before the loan's annual anniversary date, Gumbinger says.

In general, the anniversary date is when your lender sets a new rate. To do that, your lender takes into account such factors as interest rates in general, your loan balance, and the remaining length of your loan.

In general, "the only thing you can affect is the balance, and you want the new rate to be calculated on the smallest balance," he says. So send in your extra payment well before the loan's anniversary, to allow plenty of time for processing.

When you make the extra payment, be sure to indicate that it's to be applied to principal. There may be a place on your payment coupon to check off. If not, put your intentions in writing.

Although you didn't raise the issue of fees, other readers might be interested. In general, it's unlikely that your strategy would trigger any fee or prepayment penalty, Gumbinger says. Just to be sure, however, check with your lender in advance, and read through your loan documents.

I have a question about I bonds. As far as I can understand, every six months it can change according to the government. Now does that interest earned during that period always stay with the bond?

It can be confusing, so here's a brief rundown.

The Series I U.S. Savings Bond comes with two rates. One is a fixed rate. It applies for the life of your bond. The government can change the fixed rate, but not your fixed rate. Any change will apply only to new I bonds, not to your I bond.

The other rate is a variable rate. It changes with inflation. (The point of these bonds is to help you keep up with inflation.) The government sets a new variable rate every six months, in early May and early November.

So the variable rate on your I bond can change every six months.

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