Once a year Oliver makes an extra payment on his mortgage. His goals include saving on interest and reducing time needed to own his home outright. A good idea?
It might not be for everyone. For Oliver it makes sense given his goals. In addition to being cheap (he says frugal), Oliver’s idea of investing involves saving accounts and bank CDs. Money saved on mortgage interest is more than he would earn “investing.” My question is why one payment a year?
I started probing as to the source of money that was used to make the annual extra payment. Oliver said it came from…
1. Tax refund
2. Employer – Spikes in commission checks, bonuses, etc.
3. Savings – He didn’t spend everything he earned each pay period
Next I probed his reasoning for one annual payment. Oliver’s reply made me smile. Did his answer open up the cheap vs. frugal debate? You be the judge.
1. As funds became available, Oliver placed them in his saving account so he could earn interest before making his extra payment on his mortgage.
2. His bank provided free checks, but he had to pay for the stamps and envelopes.
The conversation took some time. Money was a sensitive issue with Oliver and he was proud of his “system.” Eventually, we were able to reach these conclusions:
1. Since the interest rate on Oliver’s mortgage was greater than the interest received with his saving account, it was actually costing him money when he saved rather than paid extra on his mortgage.
2. Deciding when to make a payment revolved around amount of interest savings minus 50 cents (stamp & envelope).
I wanted to avoid having Oliver swing from one extreme (annual payments) to the other extreme (payments every couple of days). I pointed out that…
1. His time had value.
2. Mortgage servicing company might object to his making payments too frequently. Would they be allowed to charge a processing fee?
Oliver thought it over. He decided on twice a month. He chose to pay extra on the principal when he made his regular monthly payment (no extra stamp & envelope). Mid-month he’d make a payment towards principal. He’d make clear notations as to what money was earmarked to go directly toward principal.
Ok, this is a little tongue and cheek. The general rule is: The earlier you make extra payments, the more day’s interest you save.
Kathy Godin, Award-Winning Loan Officer and Branch Manager
Prime Mortgage Lending, Inc.
Where people, not computer robots, answer the phone.
Proudly Serving All of North Carolina