How to make Extra Payments to Principal?

Pleasanton, CA · Member since 2016 · 11 posts · 1 vote

Hi! Does anyone have any tips on how to go about making extra payments to mortgage principal? I'm a contractor right now so my salary is constantly changing, but as soon as I get paid, I'd like to make some small extra payments towards principal .. any help is much appreciated!! Thank you!!

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Account Closed

Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes

10y

Originally posted by @Erin Monday:

@Aaron HowellSeems like a good thing to do when I can afford it, right?

Why would you want to pay a 2046 expense with 2016 money? You will be much better off keeping that extra money available in a liquid investment. If you don't have a contract next year the mortgage company will still want regular payments and won't care that you made the payments for 2046 early. You could lose your house doing this. Better to have the cash to pay bills AS THEY COME DUE!

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Aaron HowellBusiness Member
Real Estate Agent · Crozet, VA · Member since 2014 · 436 posts · 223 votes
10y
There should be a spot for it on the mortgage payment coupon along with a spot for escrow. If you're online, there should be spaces for each also.
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Justin Howe
Investor · Chandler, AZ · Member since 2014 · 303 posts · 101 votes
10y
LIke @Aaron Howell said, you should be able to specify how much gets applied to principal. It should break it down for you in online banking.
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Erin Monday
OP
Pleasanton, CA · Member since 2016 · 11 posts · 1 vote
10y
@Aaron Howell @Justin Howe Thank you! I wish there was a way to do this automatically for extra payments only! The less I have to deal with my Lender the better, but I guess it's important to make sure my payments go to Principal .. Seems like a good thing to do when I can afford it, right?
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Erin Monday:

@Aaron HowellSeems like a good thing to do when I can afford it, right?
Why would you want to pay a 2046 expense with 2016 money? You will be much better off keeping that extra money available in a liquid investment. If you don't have a contract next year the mortgage company will still want regular payments and won't care that you made the payments for 2046 early. You could lose your house doing this. Better to have the cash to pay bills AS THEY COME DUE!
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Erin Monday
OP
Pleasanton, CA · Member since 2016 · 11 posts · 1 vote
10y
@Account Closed That's what I am scared of too! But when I use a Mortgage Calculator and just add a little bit of Extra Payment each month, the amount of Interest Savings and less years on my 30 year term seems amazing .. I get so bummed about my mortgage that if I can actually get rid of it sooner, I'd do anything!! .. there must be a catch though? .. What if they don't apply my extra payments to Principal, then I wouldn't even get the benefit of those extra payments .. I think that's what you are getting at too
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David Dye
Real Estate Investor · Torrance, CA · Member since 2015 · 186 posts · 45 votes
10y
Erin Monday As a lender, I'm with Bob Bowling Money is so cheap now that you are much better holding that cash and re investing it in more property or something else with a higher return than your interest rate on the property. In real estate, leverage is everything. Use the banks money to make you more money! Hope this helps! David
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Erin Monday:

@Account Closed That's what I am scared of too! But when I use a Mortgage Calculator and just add a little bit of Extra Payment each month, the amount of Interest Savings and less years on my 30 year term seems amazing .. I get so bummed about my mortgage that if I can actually get rid of it sooner, I'd do anything!! .. there must be a catch though? .. What if they don't apply my extra payments to Principal, then I wouldn't even get the benefit of those extra payments .. I think that's what you are getting at too
Erin, the MOST you will increase your cash flow is the amount of the mortgage payment. My first mortgage payment was $329.64. Literally in ten years that was hardly a car payment. I have mortgages started in 2000's of $591, $771 and $1073 for properties that are now worth $500,000+ each because the values have more than doubled in value. If I want to use those Hundreds of thousands of dollars of equity I will have to pay the bank to do it!! Why would I pump more after tax money into them?
Really run your numbers. You'll see the interest savings are maybe a few thousand a year in FUTURE money and will have lost major flexibility. When, if CD rates go to double digits you'll be sorry you paid off 3% money.
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Erin Monday,
I'm with @Account Closed and @David Dye on this, but for a different reason.
My recommendation would be to build that money up somewhere and put it to work for you.
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
Erin Monday Bob Bowling Is right. There is no gain in buying equity. You can't spend, invest, or do anything else with equity. The idea is to make your money work for you. (Depending on your age). Interest is low right now. If your loan is low interest keep it. The only argument would be if you want the payment as income for retirement or its your primary and you don't want the payment during retirement, and that's a weak argument at best. RR.
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Victor N.
Investor · Meriden, CT · Member since 2013 · 201 posts · 145 votes
10y
@Erin Monday, almost everyone is telling you not to make the extra principal payments. In theory, this is good advice but great advice must also match a person's personality and risk tolerance. This explains why some people prefer to leverage to the max while others work hard to payoff their mortgage.
It looks like you belong to the latter group because you said : "I get so bummed about my mortgage that if I can actually get rid of it sooner, I'd do anything!!" So follow your instinct and do what works best for YOU even if it is not the most effective financially... You will sleep better at night. There is also value in reducing the total interest of your mortgage and cutting down the number of years you will be carrying that mortgage.
Alternatively, you can deposit that extra money into a separate account and never touch it so that it will be a back up for mortgage payment if your income drops drastically since you are a contractor and you seem to have some concern about that. Even a small amount like $100-$200 extra principal payment will make a big difference over the years but you will barely make $2 in interest if that money seats in a saving account.
Maybe you can even do both. Set up a small extra $100 payment towards your principal and keep the rest in a special saving account. You can set up the payment via your online banking or set it up on your mortgage company website, which I recommend because if your mortgage payment changes say due to an increase in escrow, your monthly payment will be automatically adjusted by your mortgage company website.
Do what makes you sleep better at night!
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Erin Monday
OP
Pleasanton, CA · Member since 2016 · 11 posts · 1 vote
10y
Thank you for your very helpful advice, Aaron, Justin, Bob, David Dye, David Dachtera, Ralph and Victor. I am with you when you say put your money to work for you.

Justin and Aaron, I am interested in using the auto-debit so that I am always on time and I also heard that it adds credibility to me. Bob and David Dye, what you said makes sense but I feel that making those extra payments when the going is good career-wise would go a long way if my contract business frizzles sometime down in the future.
Ralph and Victor, as you said, it would be really helpful to divide the money and put some into my principal and the rest into savings. But where do I draw the line? I did some research and found this helpful tool, https://www.motivatehq.com/early-access they have assessed my situation very well and I think it might work... keeping my fingers crossed!
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Mark S.Pro Member
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
10y
If you go that route, I would set up auto principal payments directly to the MORTGAGE COMPANY'S website, not the third party, even if it says they'll do it for free. I don't see the benefit of sending it to a third party to forward to your mortgage company. There has to be a catch somewhere. Even if there isn't, I would prefer being in control and send it directly to the mortgage company. Also, as others have said, you're likely better off to invest that money vs make principal payments. I have the debate with myself as well and decided on my own hybrid strategy: 1.) Set up auto-payments every two weeks when I get paid. This effectively makes one extra payment per year and reduces my 30 year loan to 25 years. 2.) Invest additional extra funds for growth and liquidity. This helps me sleep at night because I know #2 is the right mathematical decision, but having #1 also helps me with the psychological part of it. Hope that helps.
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Erin Monday
OP
Pleasanton, CA · Member since 2016 · 11 posts · 1 vote
10y
That's great advice, Mark. The best thing about this app is I don't necessarily have to set up my auto-payment through them, it is only an option. The numbers they run seems pretty legitimate and it cuts down the hassle of talking to my lender. I am doing the auto payment soon, very excited about it!!
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
@Mark S. @Erin Monday I think the catch is this. I bet that company only makes the payment once in a while. Say every 6 months. They use your money for that period interest free then put a lump sum payment toword your mortgage. Trouble is you would save even more interest if you just pay whatever the amount is monthly. The interest drops the day you pay the principle payment. If you just make the payment one or twice a year then you save less over the life of the loan. I never make a house payment. It is always paid by my bill pay. The rent comes on the first and the payment is made on the 25 for the next 1st. That way I always have at least one months rent on hand. Except from th 25th to the 1st. RR
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Mark S.Pro Member
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
10y
@Ralph R., when I make that extra 1/2 payment (on a month that it falls), it is immediately credited to my principal. They do not apply it when they feel like it.
Example: 1/2 payment sent to auto-pay every two weeks. January 1: 1/2 payment made and sits as I applied funds until full payment is received. January 15: 1/2 payment made, completes a full payment, and is processed as normal.
January 29: 1/2 payment made and is immediately applied towards principal.
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
@Mark S. mark I was not referring to making payments every 2 weeks I was referring to the OP's post concerning the use of a third party. And your post referring to the hidden catch of using a third party. I was agreeing with you not saying your method was wrong. Anyway you look at it you shouldn't use 2016 money to pay off a 2046 debt RR.
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
@Ralph R., there's plenty of good reasons to use 2016 money to pay off a 2046 debt.
eg. When an uniquely great deal crosses my desk in three years time, will I prefer to still have $250k debt on my books, or the $200k I could have by getting ahead of it now?...
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
@Brent Coombs I don't understand why you wouldn't have the money you used to pay off the debt? If I understand your saying you would have paid down $50,000 of the debt. I would rather have that $50k to put on the AWSOME deal wouldn't you? What if you didn't have the money for the deal because you paid it to the debt?? Commercial financing doesn't look at your DTI the same as conventional does. I would put the money on the deal not the debt. How would having less debt help you land the AWSOME deal? RR
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David Yuhaz
Investor · Allen Park, MI · Member since 2015 · 18 posts · 4 votes
10y
Hi Erin,
I agree with Victor N. I put $200 on my mortgage and for the last 6 months added to the principal and it works out you'll see how fast you balance goes down. Make sure you have emergency fund for anything that come up.
keep learning and good luck!
David
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Erin Monday
OP
Pleasanton, CA · Member since 2016 · 11 posts · 1 vote
10y
Thanks for all the valuable inputs, guys!
Mark S., that is very important information I didn't know. I probably have to monitor when my payment is credited to my principal.
David, my emergency fund is something I have set up but I am still adding money to that. If I begin adding those extra payments, it would make sense to divide my money among the mortgage and the fund. Also, I did my homework and came across this new app called Motivate that helps make extra payments easier! https://try.motivatehq.com/early-access/ is the link if anyone is interested. It made things super quick for me!!
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
Originally posted by @Ralph R.:
@Brent Coombs I don't understand why you wouldn't have the money you used to pay off the debt? If I understand your saying you would have paid down $50,000 of the debt. I would rather have that $50k to put on the AWSOME deal wouldn't you? What if you didn't have the money for the deal because you paid it to the debt?? Commercial financing doesn't look at your DTI the same as conventional does. I would put the money on the deal not the debt. How would having less debt help you land the AWSOME deal? RR
Either way could work, IF you have the discipline to put that same spare $50k over three years into an account that gives you even less interest than you'd be saving by paying down the extra $50k.
Of course, I'm assuming borrowing 100% on the uniquely great deal, so I'm not anti-borrowing. I just reckon you'll have GREATER borrowing power (against your increased equity) if you've already paid most/all of your previous debt off - quicker than you were required to! Cheers...
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Brent Coombs:

Originally posted by @Ralph R.:

@Brent Coombs I don't understand why you wouldn't have the money you used to pay off the debt? If I understand your saying you would have paid down $50,000 of the debt. I would rather have that $50k to put on the AWSOME deal wouldn't you? What if you didn't have the money for the deal because you paid it to the debt?? Commercial financing doesn't look at your DTI the same as conventional does. I would put the money on the deal not the debt. How would having less debt help you land the AWSOME deal? RR
Either way could work, IF you have the discipline to put that same spare $50k over three years into an account that gives you even less interest than you'd be saving by paying down the extra $50k.
Of course, I'm assuming borrowing 100% on the uniquely great deal, so I'm not anti-borrowing. I just reckon you'll have GREATER borrowing power (against your increased equity) if you've already paid most/all of your previous debt off - quicker than you were required to! Cheers...
Naw, the Bank will look at your monthly outgo against your monthly income. They don't care if you don't have a mortgage payment in 2046. They also will prefer that $50,000 in cash than $50,000 in equity. You may never be able to access that equity or it may cost you a fortune to do so. @Ralph R. is correct that you will be in a better position with the cash in hand.
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Logan Chierotti
Investor · Boulder, CO · Member since 2016 · 19 posts · 23 votes
10y
Put that extra cash into an ETF or some other investment that will generate a higher yield then your mortgage interest rate. With interest rates as low as they are your much better off investing that money. If you invest wisely the investment will keep paying you long after your mortgage is paid off.
1 Reply
Account Closed
Investor · NOVA, VA · Member since 2014 · 99 posts · 101 votes
10y
Erin,

This is a favorite topic amongst those here who like the debate.

Paying off a mortgage -- especially a mortgage on your home can be good or bad depending on your goals and what happens in the future. Since we haven't lived that future yet it is impossible to know if you made the right choice. So do whatever let's you sleep at night.

But you really asked about the mechanics of paying extra. Most banks have a policy on how they apply extra payments. My bank is very transparent and I can see the extra principal payment on the next statement whether it is 5 cents or 500 bucks. You should be able to find your banks policy on the Web or by stopping by a branch.

David

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Erin Monday
OP
Pleasanton, CA · Member since 2016 · 11 posts · 1 vote
10y
Logan, with interest rates as low, isn't the prospect of paying off more realistic now than ever? This is really the reason for me asking this question.
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