In addition to starting an Infrequent Bills payment system a few years ago, we also decided to add a yearly mortgage prepayment. Since the beginning of our mortgage, we’d always been able to make extra payments each month towards the principle.
After deciding to increase these payments in 2008 (and during a pregnancy-induced researching spree) I discovered how adding a yearly payment to the mix could reduce the span of our mortgage.
Prepaying the Mortgage Both Monthly and Yearly
We’re not abandoning our monthly mortgage prepayment, simply adding a yearly lump sum payment to the mix. After reviewing the budget we had decided to increase our payment by $5,000 a year.
Choosing to add this prepayment in yearly form vs. monthly doesn’t reduce the lifespan by a lot, but we will be able to pay off the mortgage two months sooner (versus increasing the amount of our monthly principal payment).
Although it may seem like a small time frame, I imagine that we’ll be plenty excited to payoff 8 weeks sooner when that deadline rolls around. Plus, as a rule we prefer to pay a lump sum rather than monthly payments.
To see how yearly rather than monthly prepayments would benefit you, compare prepayment options with this Mortgage Calculator.
A Word About the Mortgage Prepayment Debate
I’m compelled to mention that many financial gurus don’t recommend prepaying your mortgage if you are locked in at a low rate (below 8 percent). This is because you could generate more money by investing rather than paying off your mortgage early.
For example, rather than pay an extra $100 each month on your mortgage principal, you could theoretically invest that $100 in a mutual fund and earn at least 8% interest. On the other hand, a few finance experts understand that the mental benefit and reduction in risk to paying off a mortgage far outweighs the loss of these foregone investments.
As Suze Orman says, “You cannot live in a tax return. You cannot live in a stock certificate. You live in your home.” Preach it, Susie!
Where do you stand on this controversial issue?
Curious where we’re at on our mortgage payoff?