Unexpected Mortgage Payment Decrease

Last week, we received a notice from our mortgage company regarding our loan. After reviewing our account, Wells Fargo noticed the escrow monies had been overpaid.

We pay our escrow fees on a monthly basis. I know there are financial pros and cons in doing this, but it works for us to pay them monthly.  The state law (in Ohio) states the escrow balance cannot exceed a certain amount. Therefore, we get a reduction on our next payment and have a new monthly payment going forward.

The new monthly payment is only $18 less than the previous payment. But, here’s how I plan on using this to our financial advantage.

Many financial experts suggest paying an extra payment (or more) each year which is applied towards the principal. This obviously helps to pay off a 30-year mortgage faster. Another popular way to reduce the mortgage principal faster is by mortgage cycling. This where you pay your monthly payments but split it in half and pay the company twice a month versus once a month to reduce interest.

Since we have had our mortgage adjusted down a few times, I have continued to pay the first monthly loan amount we had at our closing many years ago. Each year, we pay more than half extra towards the principal loan balance. It isn’t noticed in our account since we have always done it.

With this new reduction, we will continue to pay the initial monthly loan note. Each year, we will almost be at a full 1-year extra payment towards the principal. This will happen by no concerted financial diligence on our part either. Here’s an example to explain (since examples always help me).

Let’s say the principal payment is $1,000 (obviously the total payment is more since you have to pay interest each month as well). I receive a reduction of our payment by $18. However, I will continue to pay this $18 regularly. In one year’s time, that $18 turns into $216 which is applied to our principal. No, that’s not the full extra principal payment but it’s nearly a fourth of it.

My point in sharing this is when you catch unexpected windfall, regardless of what the amount may be, take advantage of it to pay on something. If that $18 was better suited to pay on a high interest credit card then do it. If it’s going to help pay off a smaller loan so you can feel the satisfaction of having it gone, pay that. For us, it’s staying on the principal for our home.

Have you received a windfall like this? What have you done with it?

by Savings Lifestyle: Andrea on August 17, 2011

7 Comments

  • Laura - August 17, 2011 @ 4:39 pm
    1

    We have a reward with our credit card that will allow us to have a check made out to our loan company that holds my husband’s student loan. Since we do this in addition to our monthly payment, each time we do it we knock down some of the principle. We also decided when we started getting the bill to pay $100 each month instead of $92. This was only $8 a month, so we didn’t notice it. Our loan company has since changed, and they adjusted what we should pay each month, but we did not decrease what we pay. We actually increased to $125 recently when my husband got a raise, so we are getting closer to being paid off quicker! Yay for that! Since we were living fine before he got the raise, we figured that we wouldn’t miss the $25 each month. So far, so good.

  • ashley b - August 17, 2011 @ 4:55 pm
    2

    this happened the first year into our homeownership. we actually got a reimbursement check of about $900 along with the decreased payment. at the time, we had no other debt, so we kept paying the same mortgage amount AND put the $900 towards the principal. our emergency fund was fully funded to 6 months expenses, so it felt great to get a little more of the mortgage balance down. we also base our budget on 26 pay periods, not just 12 months. this enables us to pay our mortgage 13 times a year, not 12. that 13th payment all goes to the principal. unfortunately, since then, our escrow has fallen short every year. property taxes were re-evaluated one year and the next year, our subdivision was annexed into city limits. this year was the big one, the 1st full year of annexation AND re-evaluation of property taxes because of annexation. we wrote a $260+ check to cover that shortage and our payment went up buy $25. around here, we call that an emergency, so break out the emergency fund!

  • Jill - August 18, 2011 @ 12:21 am
    3

    I think you have made an excellent decision. Put it right back toward the principal of your loan. Over time this will have a big impact. Good news!! I’m fighting Wells Fargo on another front!

  • Melissa - September 28, 2011 @ 12:02 pm
    4

    I loved being able to be on a plan where we paid every other week. Then you end up paying an extra payment per year. However, our mortgage company started CHARGING us to be on the plan. When I decided I would just make the payments every other week without being on the program, they put my money in a “partial payment account” because they don’t accept partial payments. It was only when I realized my balance wasn’t going down that I called and they told me they don’t accept partial payments and that I would have to call and physically ask them to use the money I had paid to be applied to my mortgage. I quit doing that!

  • Lori - April 14, 2014 @ 8:14 pm
    5

    We put an extra $2400 on our principal in January. I used to add $200 each month onto the mortgage JUST for the principal but since it’s on auto w/d now I just make a one time check in January. I think it’s more to our advantage because it’s a big chunk and not each month.

  • Savanah Fahrney-Day - November 09, 2015 @ 6:56 pm
    6

    I just got a letter today that mine is going down by about $120/month, plus they had to write us a check for having too much in our escrow account. That check is going toward my new dryer, but I’m going to keep paying the same amount every month that I have been. The means I’ll be making an extra house payment every year without taking any more out of my budget!

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