Re: Do it yourself…the easy way! - Posted by Cathryn
Posted by Cathryn on July 10, 2001 at 20:07:31:
Patrick:
I agree that you don’t need to pay someone to set up an early pay program for you. You can make extra principal payments on your mortgage yourself, quite easily. I’ve been doing it using this method for six years, and I’ve already cut five years off my mortgage.
Here’s how it works: First, go look at your mortgage documents. Check to make sure you have no prepayment penalties on your mortgage agreement. If you have a low interest rate, you probably don’t, but check.
Then, look for your mortgage’s amortization table. Your lender should have provided one. This is a document that gives you the breakdown of your payments into principal and interest, month by month over the term of your loan. It’s a document every mortgage holder should study, because it’s a real eye-opener. Just for grins, check how much you’ve paid in interest and how much you’ve decreased the balance of your loan by paying on the principal at the ten-year mark. I think you’ll be shocked at how little prinicpal you will have paid.
Now, here’s my method. Make a regular mortgage payment next month. (We won’t include the taxes and insurance in this discussion, just the principal and interest.) At the same time you send in your regular payment, add an extra principal payment. You’ve now cut one payment off the term of your loan!
For example, my regular payment (P&I) is $405.55 a month. The first time I made a payment on this loan, I added the principal payment for the next two months, which were $43.31 for the second month and $$43.58 for the third month. I actually made two extra principal payments, for a total payment, not counting taxes and insurance, of $492.44. I now had only 357 more payments to make instead of 359. I marked on my amortization table what I had paid: the whole $405.55 for the first payment, and the $40 amounts for the second and third.
The beauty of this system is that you are always in control. You can make one extra payment each month, skip extra payments during months when you need the money elsewhere, make a lot of extra payments if you get a bonus or extra income from somewhere…it’s up to you. It’s especially good to do this when you have a new mortgage, because the principal payments are relatively low. As they grow higher, you can make an extra payment every two months, or three months, whatever works for you! And because you are making exact principal payments, and marking them on your amortization table, you will always know exactly what your balance still owed is, which isn’t true if you make extra payments that are arbitrary.
A few more comments: If you send in a coupon with your payment, be sure that you state on that the extra amount you’re sending in, and DESIGNATE IT AS A PRINCIPAL PAYMENT. Lenders tend to stick extra money you send them into escrow to pay your taxes and insurance if you don’t tell them it’s principal. I would also write on the check’s comments section “Payment includes $xx.xx extra principal paynment”…then keep the checks in case the bank ever disputes your payment history.
So… use your amortization table, check your mortgage documents (and with the bank too) to make sure you have no prepayment penalties, make as many extra principal payments as you’re comfortable with each month, make sure you specify when you send the payment in that it’s principal, mark off your payments on your A table…and that’s it! If you have any questions, e-mail me and I’ll send you my phone number to call. Good luck!