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Dear Dr. Don,
I am eight months ahead on my mortgage. Should I make principal payments only until the next payment is due in eight months?
Respectfully, — Steve
Dear Steve,
Paying a standard mortgage early typically doesn’t do much for you financially. With this type of mortgage, you’ve simply given the lender free use of your money for up to eight months. Are you envisioning this as a kind of emergency fund? If so, you’d be better off creating an actual fund that could go toward any variety of sudden financial needs.
With a simple interest mortgage, the early payments reduce your interest expense by cutting the loan balance. That’s because the interest expense on a simple interest mortgage accrues daily. This type of mortgage is fairly rare.
What really reduces the interest expense and shortens the loan term on a standard mortgage would be additional principal payments. These payments reduce the loan balance and reduce monthly interest expense. Ultimately, they help pay off the loan. Use Bankrate’s mortgage payment calculator with the accompanying amortization schedule to see how a one-time or regular additional principal payment shortens your loan and reduces interest expense.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.
Ask the adviser
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.” Read more Dr. Don columns for additional personal finance advice.
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