How to time additional mortgage payments

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Dear Dr. Don,
Currently, my principal balance on my Florida condo/home is $104,243. I have a 15-year fixed-rate mortgage at 4.5 percent and a monthly mortgage payment of $1,216, which includes the escrow of property taxes and homeowners insurance. In addition to my regular monthly mortgage payment, I am also paying an additional $1,300, which is applied directly to the principal of the mortgage.

Based on those facts, my question is: Would I achieve a faster payoff of the outstanding balance if I were to not pay the additional $1,300 per month — but then pay the $15,600 at the end of the calendar year or at the beginning of the new calendar year?

I greatly appreciate your response to this question. I look forward to hearing from you.
— Joe Jump-start

Dear Joe,
Assuming you pay a higher effective rate on your mortgage than you earn after tax on your savings, you should make the additional principal payments each month. That gives you more bang for your buck than saving the money and making one big payment once a year. By making the additional principal payment each month, you chip away at the principal balance all year long. Monthly interest expense is determined by the outstanding loan balance, so delaying the additional principal payments keeps the interest expense higher.

You can see this for yourself by using Bankrate’s mortgage payment calculator. It allows you to calculate the impact additional principal payments make on your loan, either as a monthly payment, annual payment or lump sum.

While you’re playing around with the calculators, take a look at refinancing your mortgage. Your current rate of 4.5 percent is attractive, but Bankrate’s current national average for 15-year fixed-rate mortgages is 3.34 percent. Depending on how long you plan to be in the home and your estimated closing costs, refinancing may be a viable option for additional interest savings on top of your additional principal payments.

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