Advice about making extra payment during the calendar year.

Asked by Kristi Maris, Colorado Thu Dec 27, 2012

We are closing on a home and got an amazing interet rate of 3.5. We are putting down 3.5% as the down payment on a $240K loan. We are going to have to pay mortgage insurance since we are putting down less than 20%. What is your opinion/advice for this situation. Should we make an extra payment every year (actually we would prefer to pay an extra $150 payment above what our monthly mortgage payment is) or are we better off putting that money in savings? Normally I would absolutely say that we need to make the extra payment every year to cut down the length of our loan but with interest rate being so low what is your advice. We are young 25 years old and we would love to have our home paid off by the time we are 45 - 50 but we dont want to make a poor financial decision. We want to make our money work for us. Is there any advice that you all would give us as first time home buyers? We are hoping to start a family soon and we want to make this our forever home. We dont want to flip

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James Ponzi, Agent, Denver, CO
Thu Dec 27, 2012
Hi Kristi,
Once you have a reasonable amount of "emergency funds," I would recommend putting the extra $150 per month toward any unsecured outstanding debt such as credit cards, student loans, car payoffs, etc. If you don't have any of that, then put the extra money towards the mortgage. Pay off the smallest balance debts with the highest interest rates first, then move on to the next debt. Unless your savings account is paying you more than the interest rates on your debt(s), it doesn't make sense to "save it" in the bank. Keep your money moving, and working for you at all times.
1 vote
Ron Rovtar, Agent, Boulder, CO
Mon Jan 21, 2013
As Ben mentions below, this is really a question for a financial adviser. Much depends on your situation: your goals, how long you intend to own the house, what you think the economy will do in the future, and how your house fits in with your larger financial plan. As you noted, interest rates are very low right now. Additionally, you will get an interest deduction on your taxes (if Congress does not mess with that in the coming months). So, depending on the factors mentioned above, it may make more sense for you to invest the extra money. This would be especially true if you think inflation will heat up in the coming years. Some people believe exactly that.

In other words, there are a lot of factors involved in this decision and you will do well to follow Ben's advice and talk to an expert.

Kind regards,
Ron Rovtar
Prudential Real Estate of the Rockies
0 votes
Suet, Both Buyer And Seller, North Las Vegas, NV
Wed Jan 2, 2013
Paying the mortgage bi-weekly will also save you thousands in interest, as well as shorten the length of your loan. If you can also manage to add additional payments, you will be ahead of the game as well. An excellent source to see which will have a greater impact is there are several mortgage calculators that will show you the impact of doing the bi-weekly or extra payments. If your loan is with your bank (where your other household accounts are) you should be able to do a transfer into your mortgage account whenever you have additional funds, and the transfer should allow you to apply the extra amount directly to principal. Remember to keep an eye on the balance, once you have paid 20% you should be able to remove the PMI.
0 votes
Robert McGui…, Agent, Denver, CO
Fri Dec 28, 2012

We are all proud of your for making the big step of purchasing a home even with the considerable problems and challenges involved. Also for not being shy about asking the questions needed to make the intelligent decisions to move forward with your life. Good answers below. Just wanted to add that if you do make extra principle payments, be sure to write a separate check that says 'this is for principle only'. Otherwise they will automatically apply it to interest which will defeat your purpose. Best of success and Happy New Year!!

Robert McGuire ASR
Your Castle Real Estate
Direct - 303-669-1246
0 votes
DeLUX Team R…, Agent, Littleton, CO
Fri Dec 28, 2012

Making an extra payment or more every year is a great idea but make sure you make it clear it is to the "Principal Only". Making additional mortgage payments every month is also a great idea; again make sure your additional payment is paid to the principal only. By making these extra payment you can cut years off your mortgage and save thousands of dollars.

When making major financial decisions you should always use due diligence, check with your financial planner, mortgage company etc to be sure it is right for you.

Good Luck and Good Choice
Jim Lux CRS, GRI, e-PRO
0 votes
Eva Bentz, Agent, Colorado Springs, CO
Thu Dec 27, 2012
Congratulations on the purchase of your first home!

As to your questions, making one extra mortgage payment per year will reduce your 30-year loan to roughly about 19 years. And, of course, the savings in interest are going to be considerable.

But, it all comes down to your individual financial situation and goals.

Best of luck to you.

Eva Bentz
National Investor Realty
0 votes
Dan Tabit, Agent, Issaquah, WA
Thu Dec 27, 2012
Congratulations on buying your first home and for asking a great question. I can’t give you a blanket answer however. It will really come down to the rest of your financial situation. Your mortgage payment should be affordable, but not too comfortable. The first home is the one you should have to stretch a little to reach. Between your mortgage interest write off (which we hope is continued) and future raises, your payment will be more affordable over time.
If you are in other debt, car, credit cards, student loans, you may want to focus on paying them off first. The rates are generally higher and the value that those goods are on depreciates. If you don’t already have a safety net in the way of a savings account, I would go there next. Having several months of income in savings can help you keep your house if one of you loses a job or becomes ill and misses work for a while.
If you are otherwise debt free and have a great savings (emergency) account, then paying down your mortgage would be good. I think most people will find paying a little extra every month will have the greatest net affect. Every dollar over the minimum payment on a simple interest loan goes against the principle. As your principle decreases, the total interest you will be paying will decrease as well.
I hope this was helpful, congratulations again and best wishes for a great new year.
0 votes
Kawain Payne, Agent, Seal Beach, CA
Thu Dec 27, 2012
If this is a home you plan to live in for along time, I would urge you to pay a little more every month on your mortgage ( if you can afford it)

By paying $150 to $200 more per month, you can shave years off your mortgage.

Keep in mind, paying a little extra over a long period of time will yield MAJOR benefits.

Much Happiness to You!!!!

Kawain Payne, Realtor
0 votes
Ben Grisinger, Agent, Denver, CO
Thu Dec 27, 2012
Here is my advice for you as a young couple, find a great financial advisor and ask them to help you prepare for your retirement. He or she will be a much more appropriate person to discuss your financial future with.
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0 votes
Marina Bay, Agent, Greenwood Village, CO
Thu Dec 27, 2012
Absolutely! Make an extra payment towards your principal, if you want to pay off your loan quicker.

Marina Bay
Cherry Creek Properties
0 votes
Marina, you have been very helpful and truly appreciate your input. It helps to have things explained by a couple of people so that I am fully understanding everything. When it comes to home purchase and mortgages it takes an expert. I am young and hope I am doing everything right financially. Thanks so much.
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