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?