mortgage

Early mortgage payment won't save much

Don Taylorq_v2.gifDear Dr. Don,
I would like to make extra principal payments occasionally on my home loan. Is there a specific day that the payment should be made in a given month that is more beneficial? Should I make the additional payment the same day as my automatic payment, or before or after that day?
-- Leslie Lineup

a_v2.gifDear Leslie,
For most mortgages, interest is paid in arrears. That means that the interest expense you're paying in the December mortgage payment is the interest expense for the month of November.

Making additional principal payments early in the month can reduce the interest expense for the month. It doesn't reduce your mortgage payment; it just increases the amount of money that goes toward paying down principal that month.

Here's an example for a $200,000 30-year, fixed-rate mortgage at 5.25 percent, with its first mortgage payment due in December 2009, using the amortization schedules available with Bankrate's mortgage calculator.

Month/yearPaymentPrincipal paidInterest paidBalance
December 2009$1,104.41$229.41$875.00$199,770.59
January 2010$1,104.41$230.41$874.00$199,540.18
Total interest paid$1,749.00

Month/yearPayment
plus $100
Principal paidInterest paidBalance
December 2009$1,204.41$329.41$875.00$199,670.59
January 2010$1,204.41$330.85$873.56$199,339.74
Total interest paid$1,748.56

Adding $100 per month to the monthly payment reduces December's interest expense from $874 to $873.56, for interest savings of 44 cents. The earlier in the month you make the additional principal payment, the more interest savings you'll have for that month, but it's a matter of pennies.

The real savings comes from not owing the interest expense on that additional principal payment over the remaining term of the mortgage, not by what day in the month you make the additional principal payment. Choose what's convenient for you to do this automatically. For most people, that means adding it to your regular monthly payment.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Dr. Don columns for additional personal finance advice. To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money."

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