Extra principle payments for quick pay down

[Jim Hartmann]

Hello all. We are in the process of purchasing another personal home and turning our current home in to a rental.  I have heard in the past about a strategy where you send in a separate monthly payment for principle only after you send in the scheduled payment. This process helps to save interest in the longer term of the loan by having less principle that will be accruing interest as time goes on. My question is, has anyone used this practice in the past? If so, how successful was it? How much extra did you pay towards the principle each month? I understand that you want to use particular wording to specify where this extra principle payment goes to. What particular wording and steps need to be taken to make sure that this extra principle payment is applied properly?

[Bob Born]

Jim, let's say your monthly payment is $500. That breaks down to $400 interest and $100 and principal. If you pay an extra $100 on that first payment you will effectively reduce one entire monthly payment off of the backend of the note. The next month you'll see on your amortization schedule that your interest payment will be something like $399 and the principal will be $101. The second month if you make a principal extra principal payment of $101 you will now you will knock off another entire month off of the end of your payment schedule. As several people have mentioned some banks request you to indicate where that extra money is going whether principal or escrow. Realistically you can look at paying a 20 year loan off and approximately seven years give or take. The problem is that principal amount goes up towards the end of the loan and that extra payment gets larger and larger each month. If nothing else, Make sure that you pay that extra payment at least the first 10 years as that will reduce the overall number of years significantly. You are saving much more. If your interest rate is 5% you are safeyou are saving much more than 5% on your money that payment in month one year one is 5% each year for the next 20 years impressive use of your money.