Early Mortgage Payment
It is important to make sure your mortgage payments are in before the due date to avoid late charges. You can also make additional payments toward your mortgage to help retire the note early. Extra, early payments toward a mortgage can have a significant financial impact.
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Features
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A mortgage payment consists of the loan payment and escrow charges. The loan part includes principal and interest toward the loan. Escrow is for property taxes and homeowner's insurance.
Considerations
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In the early years of a mortgage, the majority of the payment is interest on the loan and only a small portion is payment of the principal. A $100,000, 30-year, 6 percent mortgage will have a P&I payment of about $500, and only $100 of each payment goes to reduce the principal for the first several years.
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Benefits
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Paying an additional amount toward principal with each payment will significantly shorten the term of the loan and save on the total interest paid. Paid-down principal is money that does not earn interest for the lender for the entire term of the loan.
Effects
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Paying an additional 10 percent or $50 on the $100,000 mortgage each month will shorten the term to payoff by five and half years and save $24,500 in interest payments.
Misconceptions
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Paying extra money or ahead on your mortgage payment does not reduce the amount you must pay the next month. The full payment is due each month and extra payments go to reduce principal and shorten the term of the loan. Send in a at least a full payment every month.
Warning
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If you add extra to your payment, be sure to note on the payment coupon that the extra money is to be applied to principal. Otherwise, the mortgage company may just add it to the escrow account.
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