Paying extra principal on mortgage to save money

By Melissa Wirkus

As Americans are beginning to save less and less every year, it is important for consumers to think of new ways to save money.

But who would have thought you could save money by pre-paying your monthly mortgage payment?

Contrary to popular belief, there are actually a variety of ways to save a lot of money by making a few simple changes on your payment schedules.

Of course, pre-payments are not for everyone, so it is important to talk to your lender before you make any changes to your current situation.

An October 1, 2006 article by Joanna Glasner of Bankrate.com, “Mortgage rate high? Get same rate on savings,” discusses this alternative method of saving money. “Think it's a raw deal that you pay far more interest on your mortgage than you receive on your savings? There's a quick way to wipe out that gap and get the same earnings -- in some cases even higher -- that you pay out: Take the amount of money you would put into a savings account and pay extra principal on your mortgage, instead.”

An example of this would be that if you have a mortgage with a 6.5 percent interest rate, and you make an extra payment against the principal, you have an investment that yields 6.5 percent, according to Glasner.

“While prepaying isn't for everyone, financial advisers say it's often a smart savings strategy. Among the advantages: low risk, flexibility and easily measured savings. Plus, there's a reward at the end.”

This “reward” would be having complete ownership of you home by eliminating your mortgage completely. Although some financial analysts believe that you should never eliminate your mortgage, it can be a good idea for some.

“‘You get to actually own your house -- which is a lot more comfortable position to be in than a stock certificate or bond if times get tough,’ says Marc Eisenson, co-founder of Good Advice Press, a publisher of debt reduction books. ‘Also, your savings are liquid. You can get a home equity line of credit or loan if you need it.’”

There are a variety of ways to pay the extra principal on your mortgage to save money that will fit many people’s budgets.

Since the majority of homeowners do not have the traditional 15- or 30-year fixed rate mortgages, but instead employ non-traditional mortgages such as an adjustable-rate mortgage, or ARM, there are a variety of options available to save money.

“Homeowners who get paid every two weeks may feel comfortable with a biweekly payment plan. This involves paying half of the monthly mortgage bill every two weeks, which effectively adds up to paying an extra month's mortgage each year. Another common approach is to tack on an extra 10 percent to the regular payment.”

But if you are using one of these savings strategies on an ARM, be sure that it makes financial sense. If your loan is expected to adjust sharply in the next few years, then it is probably a good idea to pre-pay. But if you expect your rates to stay low, than it may not necessarily be good, talk to your lender to see what option is best for you.

Also, make sure your loan does not have a pre-payment penalty, or else you could be penalized.

Back to Articles

Legal Disclaimer
Licensing