Firstly, my wife and I decided to have custom closets installed in our master bedroom, and in doing so, I had to bypass an additional principal payment. This is a decision that we are still happy with because not only were we in need of some organization in our master bedroom closet, but it also will help to increase the value of our home when it comes time to sell.

Secondly, with the declining market, we do not have the same amount of extra cash lying around that we can use to make an additional principal payment. Over the past 3 months, my portfolio value has decreased by half. Thankfully, I’m only 30 years old, so I haven’t pulled any money out of the stock market, and in fact, I’ve recently started to put more money into the stock market, and will probably continue to do this as long as the Dow Jones remains below 10,000 points. If Warren Buffet is doing it, it can’t be a bad idea, right?

With the market the way it is now, I am left with the following question: Should I now put more money into the stock market, or should I return to making additional principal payments? This is a tough question, because the market still seems to be very volatile, even though this past week was mostly in the green, but making additional principal payments guarantees me savings on mortgage interest.

For the remainder of this year, I am going to bypass any additional mortgage acceleration payments and leave a majority of my extra money in high yield savings and money market accounts. If I see a good opportunity in the stock market, I may invest in some high dividend yielding stocks, but for the most part, I am just going to sit on as much cash as I can.

This was a once in a lifetime opportunity in terms of cost, so I couldn’t turn it down. Over the past few years, my wife and I have a had various companies come out to give us quotes on custom closets – From California Closets to Closet World, all of the quotes that we got were somewhere in the $5,000-$6,000 range. And to be honest, I really couldn’t see spending that much… after all, we live in a condo. So out of the blue, I get an offer for the exact closet system we’ve been looking for, but at half the price! $2,500 for the whole job!!!

The closets get installed tomorrow, so i’ll post some updates and maybe some before and after pictures. Hopefully missing this extra principal payment will pay us back in added value in our house.

This post is just meant to detail and give some insight on the effect of making the additional principal payment last month, and how it effects this payment and all future payments toward my mortgage. My July 1st payment of principal and interest was $1,509.77. Of this amount, $1,248.60 went toward interest, and $261.17 went toward principal. I still have about 28 years left on my loan, so my payments toward interest will be quite high for a while longer, but without the additional principal payment, my next regular monthly mortgage payment would have been less favorable (though it is hard to become less favorable than 80% going toward interest). Here’s what the breakdown of my regular payment if I had not sent in the additional principal payment: $1,261.89 toward interest and $247.88 toward principal leaving me with a balance of $237,284, rather than my current mortgage balance of $234,770.

As I noted in previous articles, the amount of savings in interest expense in the short term really isn’t that great – only about $14 after 1 month, but over the life of the loan, it will really add up, and if I continue to make additional principal payments, it will add up even faster.

Stay tuned for an update on my next additional principal payment – I’m hoping to put earnings from this blog directly toward all of my additional principal payments.

1. A positive cash flow – meaning that you are earning more than you are spending each month.
2. A desire to take charge of your mortgage.

I think there are some other requirements, just as there are with a money merge account, such as:

• A zero-balance Home Equity Line of Credit (HELOC) that allows you to transfer money in and out of it.

I’m just going to paraphrase and condense the version that was on eHow, but feel free to check out the full version of the article at the bottom of this post. In this example, we are assuming that we have a $200,000 mortgage and that we make $5,000/month.

1. First determine your positive cash flow – Take the combination of all your bills (mortgage, credit cards, utilities, car payments, etc.) and subtract this amount from your monthly income amount. This will be your Monthly Cash Flow – if the number is negative, this option will not work for you. The more positive cash flow you have, the more interest you will save, and the faster you will pay off your mortgage.
2. Write a check to deposit the entire amount of your paycheck to the principal balance of your mortgage. This will make your new mortgage balance $195,000, so for the entire month, interest will accrue on $195,000 rather than $200,000. Next step, paying bills.
3. Get a credit card that gives some sort of rewards if you don’t already have one. Credit cards basically allow you to “borrow” free money for up to 45 days, as long as you pay your interest off in full every month, you will not accrue any interest charges. Pay all (or as many as possible) of your bills on your credit card, and for simplicity sake, let’s say that we make a total of $2,000 in charges.
4. Next, you’ll use your home equity line of credit (HELOC) to pay off your $2,000 credit card balance and your $1,000 mortgage payment. So now, your liabilities are your mortgage $195,000 and your HELOC $3,000. A total of $198,000.
5. With your next paycheck, payoff the balance of the HELOC – with the balance of the HELOC being paid back in approximately a 1 1/2 months time, any interest that accrues will be minimal, and certainly much less than the interest that would have accrued on $200,000 vs. $195,000.
6. Continue this process repeatedly.

Read the original article on eHow.

My biggest question is this: after the HELOC balance is paid back, we still have $2,000 in positive cash flow. Should this amount be put directly back into the principal balance on your mortgage, or should you wait for your next full paycheck?

After considering this method in depth, I realized that you have to be fully ready to commit all of your extra money directly to your mortgage. Something that I think a lot of people would have a hard time with. I also wonder if the credit cards are even necessary, or if doing that just helps to further offset interest by not having that balance on your HELOC for an entire month or so.

I’d love to hear comments, if any of you have ever experimented with mortgage acceleration, money merge accounts, or offsetting your mortgage interest with a HELOC account, I’d love to hear your opinions and success/failure stories.

Pros and Cons of the extra payment – Yes, it was tough sending in an extra $2,500, but it is great being able to look at my mortgage statement and to see the principal balance drop more in one month than it has in the past 10+ months. Stay tuned for more updates as I try to pay down my mortgage balance in half the time!

1. Your existing mortgage.
2. A Home Equity Line of Credit (called an ALOC within the money merge account system – Advanced Line of Credit)
3. Money Merge Account Software

Basically, the way it works is all income that you recieve goes toward paying off the balance on your ALOC. Any income that you receive, goes straight into that account. As your you make deposits, the money merge account software tells you when to make payments toward your mortgage, the primary thing that helps you pay down your mortgage in 1/2 the time or less is the payments that the money merge account software tells you to make – it schedules larger than normal monthly payments which lowers your principal balance faster, this in turn, decreases the amount of interest that you’ll be paying toward your subsequent mortgage payments. While the ALOC will be charging you interest on your outstanding balance (it must be an open-end interest calculation), the MMA software predicts this and minimizes (or cancels) the amount of interest that you’ll be paying on your primary mortgage.

All in all, money merge accounts seem like they can definitely help cut down on the time it takes to pay down a mortgage, however it will require a lot of discipline on the part of the borrower. In the end, it is ultimately up to you, the borrower – are you disciplined enough to put all of your extra money directly into your mortgage? Could you just do this yourself, or is the software necessary?

I don’t believe it has been released yet, but I recently read an article that mentioned there may soon be a Credit Card based money merge account option. I

My simple answer to this question is this: It would only be more beneficial to invest this money if you’re very disciplined with money management. I say this because I have many friends who spend their savings accounts as quickly as they put money into it. Below, I’ll discuss the pros and cons of mortgage acceleration through increased principal payments.

Pros

• You can potentially save $1,000’s to $10’s of thousands on payments to interest.
• Your dreams of home ownership will become true in a shorter time frame.
• After paid off (in a shorter time), you can use your mortgage payments to acquire a 2nd property, a rental property, or some fun toys that you’ve wanted for years.

Cons

• By investing, rather than making extra payments, you can earn $1,000’s of dollars in extra interest income.
• By paying off your mortgage early, you no longer get the tax break of writing off your interest expense.

I’m sure that there are many more pros and cons, but I can’t think of any right now. If you have any that you’d like to see added to the list, just shoot me an email and I’ll add them. I found this post helpful when looking into mortgage acceleration.

My June mortgage payment had already been made, but I still wanted to get in an additional principal payment prior to my July payment being made, so I wrote a check for $2,500 and sent it in today. This payment will basically be applied as additional principal to my June payment (as long as the receive and process it prior to my July 1st payment), so let’s take a look at what this will do to my mortgage balance and next months principal and interest payments.

Now, with the obvios fact aside that I spent an extra $2,500 on my June mortgage payment, let’s look at the resulting July mortgage balance and the resulting principal and interest payments. I’m decreasing the amount I’ll have to pay to next months interest by $13.28 – Yes, this is very small when compared to the $2,500 I just forked out, but let’s consider it over the course of the next year.

Assume I don’t make another additional principal payment, then I’ll be paying $14,857.40 just to interest over the next year, whereas if I had not made the additional principal payment, I would have been paying an additional $15,021.52 to interest over the next year. A differenct of $164.12. I still have 28 years remaining on my loan, so considering just a year is a very insignificant amount, but if we compare it to what I’ll pay to interest for the remainder of the life of my loan, that’s where we’ll see bigger savings. With the additional $2,500 principal payment, I’ll be paying $262,553.97 toward interest over the remaining live of the loan, and without the additional principal payment, I’ll be paying $274,772.74 to interest over the life of the loan. This is a savings of $12,218.77 – just for making an additional $2,500 payment today. More importantly, I’m also shaving 9 payments off of my mortgage, having my final payment of $373.92 coming due on 12/1/2035 rather than 9/1/2036.

Some of you may be asking yourselves, “Why would it matter when the additional payment is received, it gets applied either way, right?”. It does get applied to my mortgage balance either way, however, the reason that I want to make sure that my additional principal payment is sent in and applied prior to my next automatic mortgage payment is because it will help to decrease the amount of interest that is paid on all of my subsequent mortgage payments. Why is this? Let’s say for simplicitys sake that I have a $100K loan at 5% with a monthly payment amount of $536, and I’m going to send in an additional principal payment of $10K. If I don’t send my additional principal payment, about $120 will go to principal, and $416 will go to interest. However if I pay my $10K additional principal payment (I realize this is a large extra payment, but it just helps to illustrate a point), then my next regular mortgage payment will have about $375 go to interest, and about $162 go to principal. It basically reduces the amount of interest that you pay in the long run. In this example, I save about $40 on interest in one month, over the course of the year, that will add up to be about $500 saved in interest. It adds up, and obviously, the quicker and more drastically that you can lower your principal balance, the less money you’ll be spending on interest every month.

Will this work for everyone? Absolutely not. First, you’ll need extra money every month in order to be able to make extra payments. Secondly, there are people of the school of thought that you’re quite simply an idiot if you pay off your mortgage early because you’ll be losing the tax benefit of being able to write off your interest paid. I think its absolutely retarded to be excited about writing off your interest expense, but that’s an entirely different story.

I read an article awhile back that said if you want to pay down your mortgage in half the time, all you have to do is send in a payment equal to double the principal each month. So lets take my latest payment for instance: On June first, my payment amount was $1,791.57 – of this amount, $246.57 went to principal, $1,263.20 went to interest (a waste of money in my opinion) and $281.80 went toward my escrow account to pay for my property taxes. Let’s say that I wanted to pay my mortgage down in half the time, then I would simply have to double the principal amount from $246.57 to $493.14, bringing my total monthly payment to $2,038.14. Really not that big of a difference. I could simply make up this amount by not going to lunch everyday – figure I spend on average $10/day on lunch over 20 days, there’s $200 bucks right there. Almost the full amount that I need to make a double principal payment. Instead of changing my lifestyle though, I’m going to use the income generated from this blog (and some of my other online ventures) to make additional payments to principal.

To start this, I’m going to be sending in a large principal only payment in during the middle of June so that when my July payment is calculated, more of my payment goes toward principal since the interest owed will be calculated on a lower amount. During June, I plan to send in a principal payment in the amount of $2,500 + whatever other income I can pull from this blog during that time. The $2,500 is my 2007 tax return, and since I haven’t blown it on anything stupid yet, I figure that I might as well put it to good use.

Stay tuned for updates on my personal mortgage acceleration program as I’ll be creating posts once or twice each month detailing the benefits (and the perils) of putting extra money into my mortgage each month.