Dear Dr. Don,
With all that has happened over the last two years, I have been really fearful about my home mortgage. I have been paying ahead, so right now I have my mortgage payment paid through April 2010. I would like to get six months ahead. Is this a sound strategy?
— Holly Habitual
I wouldn’t recommend your approach. You’re giving the lender free use of your money. Why not keep the money in reserve as an emergency fund and use it to make the mortgage payment only if needed? That way, you’re earning the interest and having your money grow, albeit at today’s low interest rates.
People who make additional principal payments reduce their interest expense by paying down the mortgage balance. If they have a fixed-rate mortgage, their monthly payment continues at the same amount and due date, but the loan gets paid off sooner. If they have an adjustable-rate mortgage, their monthly payment amount may be reduced at the next scheduled adjustment to their mortgage rate, but the remaining loan term will stay the same.
However, regardless of which type of mortgage you have, additional principal payments don’t help with your concerns about the economy.
You need to figure out how your mortgage company is crediting these additional payments. If they were crediting them to principal reduction (e.g., as additional principal payments), they’re not accomplishing your goal of paying ahead. If they were processed as early mortgage payments and your next mortgage payment is due in May 2010, you’ve given the mortgage company an interest-free loan through April.
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