Paying Ahead Of Schedule?

Lee has a question about funding college for himself, but Dave questions how he's going to make it happen with the way he pays the principal balance on his house.

QUESTION: Lee is going back to school in 10 months. He and his wife are debt free except the house, and have been paying that ahead of schedule to pay it off faster. His next payment isn’t due for 11 months, and he’s going to sell the house in 9 months. Should he stop paying and save up for school? Dave thinks he’s made a big mistake here.

ANSWER: You should not be doing that! That doesn’t pay it off faster. It should be applied directly to the mortgage principal. If you were applying it to the principal, your payment would be due next month. If you had a $100,000 loan and gave them an extra $1,000, then your interest the next month should be calculated on $99,000. Right now it’s not, because you’ve just paid out there in advance. You are getting no interest savings by doing it this way.

You need to lower the principal balance every month so the amount of the next month’s payment that you pay goes to principal. Prepaying your payments doesn’t do that; prepaying principal does that. Convert all those payments you made to principal.

You could save up for school, if they give you a hard time about redoing these payments for principal. Either way you’re going to get your money back out of the house and be fine. Apply it all to principal. Then keep paying your payment.