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Many financial advisors will recommend that home owners include a little additional principal with their mortgage payments each month. For a just little extra each month, they can take years off the end of their payment schedules. Very often, an extra principal amount of just $25 per month and can wipe out as many as five years from the end of a payment schedule, in effect reducing a 30-year mortgage to just 25 years.
Similarly, others recommend setting up a bi-weekly payment schedule, which will result in the equivalent of 13 full mortgage payments a year. This, too, will cut years from the end of a mortgage payment schedule. Therefore, with very little effort and for only a minimal of extra money, people can greatly reduce the amount they have to pay back over the life of their mortgages.
So, this is no-brainer, right? Shouldn’t everyone be doing it? Well, not really. Like many other things in life, it’s not as good as it sounds. If you never have trouble making your mortgage payment and you intend to keep your house until you pay it off, then you can greatly benefit from sending in those extra principal payments. If not, it may not be such great idea.
Let’s suppose you make those extra payments that result in five years theoretically being chopped from the end of your payment schedule, but then you decide to sell after being in the house only 15 years. What kind of benefit would the extra money ultimately get you? You would get none at all. That’s right -- you would get absolutely no benefit from having sent in all that extra principal money.
The benefit is derived from taking payments away from the end of the schedule. It is completely a back-end benefit. However, if you don’t allow yourself to get to that point, you will never realize a benefit. But don’t you benefit from less principal to pay off when the sale is made? You do, but you can get a greater benefit by putting that extra money in a savings account each month instead of sending it in to your mortgage company. At least, you could get some interest on your money by putting it in savings. The mortgage keeps your money, interest-free.
Here’s another thing to consider as well. If you sometimes have trouble making your mortgage payment, it is probably not a good idea to send in the extra principal. The reason is that the extra money you send in this month will not help you next month or the month after that. Let’s say you have an $800 per month mortgage and send in an extra $200 for four consecutive months. However, in the fifth month, you suffer a setback and cannot make the payment. The mortgage company will not use the use the extra $800 you paid over the previous four months as a substitute for the fifth month’s payment. You will be in default.
You would do better to sock away any extra money you might have in a given month and use it to pay your mortgage in those months when money is tight. It would be a shame to have your house foreclosed on in spite of the fact that you actually paid more over the time you had it than you actually had to.
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