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Dear Cheddar,

I know you are working hard to pay off your mortgage early. How does that work? If we make extra payments on our mortgage, how do we ensure they go towards principal and not just interest?


Interest Really Killing Early-Retirement Dreams


What a great question! You are wise to be thinking about paying off your mortgage early. Even with today’s “SUPER! SO LOW! UNBELIEVABLE!” interest rates, interest payments add up quickly and can almost double your costs over the term of the load. For example, a $200,000 loan at 4% interest adds up to $144,000 in interest over 30 years. As Cheddar Pops would say, that’s nothing to sneeze at! If you add just $100 extra to every payment, that total drops to $116,000 and your mortgage will be paid off in 25, not 30, years. Pretty cool, huh? You can also make one-time lump sum payments, which is a great use for any windfalls you might receive such as a bonus or inheritance.

How you go about your early payoff will depend a bit on how your lender structures your payments. Your first step should be to confirm that your mortgage does not include a pre-payment penalty — almost none do nowadays, but it doesn’t hurt to double check. Such a provision would allow the lender to charge you extra to pay off your mortgage, negating the cost savings of the early payoff.

After that, depending on your lender’s procedures, you should be able to (1) mail a check with “Principal Curtailment Only” in the memo line; (2) make an online payment and select an option for “Additional Principal” or something similar; or (3) call your lender and make a transfer over the phone, specifying that the payment should be applied only to principal. Make sure you also cover any interest payments that are due at the same time; paying off your principal early does not excuse you from your interest obligations!

If you accidentally make an early payment (as I once did!) as opposed to an additional principal payment, you’ll just end up a month ahead on your payments — your overall interest will not be reduced. So you are right to be thinking about the mechanics of early payoff and how to make sure your lender flags any payments appropriately.

Good luck in your journey, and keep an eye out for some more posts on mortgages and Home Buying 101 to come!



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