additional principal, monthly or yearly?

[greenskeeper]

I have a 30yr mortgage that I have been paying extra principal towards to hopefully pay off in 12 years.

I send the extra principal every month with my payment.

I have an adequate emergency fund of 1 years worth of expenses.

My question is whether I should "bank" the extra principal payments into another savings account and then at the end of the year put the lump sum towards the mortgage.

I know that I will end up paying more interest on the loan, but the funds would be available during the year for an emergency.

[Hector]

If you have an adequate emergency fund of 1 year worth of expense, why you need to worry about considering extra house payment as emergency fund and pay more in interest toward mortgage?

[disneysteve]

I agree with Hector. Why keep the money in a 1% savings account (or less) when you could be paying off a 4% mortgage (or higher)?

Keep doing it monthly. I think it is also psychologically easier that way - send in a smaller amount each month rather than a large lump sum. Plus, it eliminates the temptation to spend that money on anything else.

[greenskeeper]

to pay down a 30yr note in 12yrs it is a large amount of money towards principal each month. With the uncertainty in the economy I wonder sometimes.

[disneysteve]

to pay down a 30yr note in 12yrs it is a large amount of money towards principal each month. With the uncertainty in the economy I wonder sometimes.

You have prepared for uncertainty by maintaining a very large emergency fund (which may not be necessary but I don't know your situation). Unless you can come up with a good reason for needing more than a 1-year EF, and assuming you are taking care of everything else like maxing out your retirement savings, I see nothing wrong with prepaying the mortgage each month.

[Slug]

Further agreement with Hector and Steve. You have an adequate EF. If paying down your mortgage is what you want to do with surplus income, you should continue on your current plan.

[EconoMutt]

I'd say continue to pay extra each month.
Most people are lucky to have 3 to 6 months emergency funds in place.
You're way ahead of the game.
Good Luck

[jpg7n16]

to pay down a 30yr note in 12yrs it is a large amount of money towards principal each month. With the uncertainty in the economy I wonder sometimes.

If you paid all that cash at the end of the year, wouldn't you still be worried about the economy at that point?

How do you know you'd actually pull the trigger and pay it all towards your mortgage, instead of holding onto the cash just because?

If your goal is to pay off the mortgage, I'd pay extra each month.


(I'd also move half of the EF into a short-mid term bond fund, but that's a different story )

[Hector]

Most people are lucky to have 3 to 6 months emergency funds in place.

I think, it has more to do with being disciplined than being lucky. It is likely that OP had enough cushion along with 20% down payment before he got mortgage unlike a lot of us who feel like we have to take mortgage ASAP.

[FrugalGirl321]

to pay down a 30yr note in 12yrs it is a large amount of money towards principal each month. With the uncertainty in the economy I wonder sometimes.

If you're that concerned about it, then split the payment up. Save half, and put the other half on the mortgage. If you feel like you have enough saved, then make a lump sum payment to pay it off. This way, you'll reap some of the benefit of paying off the higher interest mortgage payment.

[greenskeeper]

If you paid all that cash at the end of the year, wouldn't you still be worried about the economy at that point?

How do you know you'd actually pull the trigger and pay it all towards your mortgage, instead of holding onto the cash just because?

If your goal is to pay off the mortgage, I'd pay extra each month.


(I'd also move half of the EF into a short-mid term bond fund, but that's a different story )

because my goal is to pay off in 12 years.

If i did a lump sump at the end of the year perhaps the payoff would grow to 14-15 years?

[jpg7n16]

because my goal is to pay off in 12 years.

You could meet your goal a lot cheaper by paying each month.

I did the math to figure out what exactly the difference in your strategies would work out to.

Given a $100,000 30-year fixed mortgage, at 5% - the normal payment would be $536.82. In order to pay it off in 12 years, the payment would rise to $924.89. (An extra 388.07/month = 4,656.83 for the year)

To pay an extra lump sum only at year end, after paying your regular monthly payment all year - you would have to pay a lump sum at the end of each year $5,082.19.

This is a yearly difference of $425.36 MORE than you would have to pay by waiting till year's end. Over 12 years, that would be an extra 5,104.37 (on 100k mortgage)


To figure out what the difference would be for your specific mortgage, take the $5,104.37 times ($your mortgage/$100k)

Example-
This strategy on a $200k mortgage would cost an additional $5,104.37 * (200k/100k) = 10,208.75
A $250k mortgage would cost an additional 5,104.37 * (250k/100k) = 12,760.93



So if you'd like to save like $5-10k and still meet your goal in 12 years, I'd suggest paying monthly.


I only ask because it seems like you have a competing goal of keeping as much cash on hand as possible. If those come in conflict, which goal will win?