razmaspaz

I bought my house before I had 20% to put down on it. That meant that I had to either get private mortgage insurance (PMI) or take a second loan to cover the difference between my down payment and the 80% part of my loan. I chose the latter as it allowed me to avoid the cost of PMI.

This isn’t a post about which is better, or the dangers of ARMs (which I don’t have). Thats a topic that has been discussed at length now in the news, and at the water cooler. This is a post about a discovery I made while making an extra payment on my loan today.

I had some extra money this month to put towards my loan. My wife and I are trying to pay this off soon in an effort to lower out monthly expenses. What was interesting about the extra payment, was that it actually counted as a payment. Even more interesting, was that making yet another payment counted as well. As it turns out, each additional payment I make on the loan pushes back the due date of my next payment. That means that if I break up my extra payments into lumps, I can extend my payment date out several years.

I should qualify this. Each payment has to be more than the actual amount for a payment, or it won’t count. “So what”, you may be saying. Well here’s the rub. If I have a full year of extra payments banked, and I fall on hard times, well I can just not not make payments on the loan. Sure I’m racking up interest in the meantime, but I DON’T HAVE TO MAKE A PAYMENT. Thats huge. In the event that I want or need to take a year off from work, or that I lose my job, my loan won’t go into default. So now, not only am I paying off my loan faster, decreasing my debt load, but I’m also building an insurance policy for the future. And it doesn’t cost me a dime, in fact you could say it pays me in the form of avoided interest.

If you have a mortgage and you are making extra payments, you should look into this. I know from now on I’m making my extra payments in increments.  See if your bank will let you do this too.