December 4, 2009 in Mortgages

Dear 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

Dear 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.

Early mortgage payment scenario
 Month/year Payment Principal paid Interest paid Balance 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/year Payment plus \$100 Principal paid Interest paid Balance 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.

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