Paying over the minimum mortgage payment
Let's look at some of your options: In a savings account, your $40,000 might be earning maybe 0.5%, if you are lucky.  In a year, you'll have earned $200.  On the plus side, you'll have your $40,000 easily accessible to you to pay for moving, closing costs on your new house, etc. If you apply it to your mortgage, you are effectively saving the interest on the amount for the life of the loan.  Let's say that the interest rate on your mortgage is 4%.  If you were staying in the house long-term, this interest would be compounded, but since you are only going to be there for 1 year, this move will save you $1600 in interest this year, which means that when you sell the house and pay off this mortgage, you'll have $1600 extra in your pocket. You said that you don't like to dabble in stocks.  I wouldn't recommend investing in individual stocks anyway.  A stock mutual fund, however, is a great option for investing, but only as a long-term investment.  You should be able to beat your 4% mortgage, but only over the long term.  If you want to have the $40,000 available to you in a year, don't invest in a mutual fund now. I would lean toward option #2, applying the money to the mortgage.  However, there are some other considerations: Do you have any other debts, maybe a car loan, student loan, or a credit card balance?  If so, I would forget everything else and put everything toward one or more of these loans first. Do you have an emergency fund in place, or is this $40,000 all of the cash that you have available to you?  One rule of thumb is that you have 3 to 6 months of expenses set aside in a safe, easily accessible account ready to go if something comes up.   Are you saving for retirement?  If you don't already have retirement savings in place and are adding to it regularly, some of this cash would be a great start to a Roth IRA or something like that, invested in a stock mutual fund. If you are already debt free except for this mortgage, you might want to do some of each: Keep $10,000 in a savings account for an emergency fund (if you don't already have an emergency fund), put $5,000 in a Roth IRA (if you aren't already contributing a satisfactory amount to a retirement account), and apply the rest toward your mortgage. First off, putting extra cash toward a mortgage early on, when most of the payments are going to interest, is the BEST time. If you pay an extra $1 on your mortgage today,  you will save 30 years worth of interest (assuming a 30 year mortgage). If in 29 years you pay an extra dollar, you will only save 1 year worth of interest. That said, there are lots of things that go into a decision like this. Do you have other debts? How stable is your income? What is the interest rate on your mortgage compared to any other debts you may have or potential investments you might make? How much risk are you willing to take? Etc. Mortgages tend to be very low interest, and, at least in the U.S., the interest on them is tax-deductible, making the effective interest rate even lower. If you have some other loan, you are almost always better to pay the other loan off first. If you don't mind a little risk, you are usually better off to invest your money rather than pay off the mortgage. Suppose your mortgage is 5%. The average return on the stock market is something like 7% (according to my buddy who works for Wells Fargo). So if you put $1000 toward your mortgage, you'd save $50 the first year. (Ignoring compounding for simplicity, changes the exact numbers but not the basic idea.) If you put that same $1000 in the stock market, than if it's a typical year you'd make $70. You could put $50 of that toward paying the interest on your mortgage and you'd have $20 left to go on a wild spending spree. The catch is that the interest on a mortgage is fixed, while the return on an investment is highly variable. In an AVERAGE year the stock market might return 7%, but this year it might return 20% or it might lose 10% or a wide range of other possible numbers. (Well, you might have a variable rate mortgage, but there are still usually some defined limits on how much it can vary.) take a look at this graph here: http://mortgagevista.com/#m=1&a=40000&b=4&c=30y&B&oa&ob&oc&od It shows how much it costs to borrow $40k for 30 years. You did not post your mortgage rate or loan term, so I used 4% over 30 years (you can easily update this with your actual details). While this does not show the costs of your total mortgage, it does help you get an idea of just how much the 40k$ in question is costing you in interest. If you hover over the month one year from now you will see that you will have paid around $1587 in interest over the course of the year. If you were to put the full 40k$ toward your mortgage right now, you would avoid having to pay this interest over the next year.  The next question I think you would have to ask yourself is if there is anything else you could do with that money that is worth more than the $1587 to you.  Is it worth $1587 to keep those funds liquid/available in case you need to use them for something else? Could you find other investments you feel comfortable with that could earn you more than $1587?  Is it worth the hassle/risk of investing the funds somewhere else with a better return? If you can't come up with anything better to do with the money then yes, you should probably use the funds (or at least part of them) towards the mortgage.
If you have a minimum monthly payment amount of $190, then you have to make a payment every month. If you pay only every 3 months (even if you pay 3 times the minimum amount, or much more), you would not be making the minimum monthly payment for each month: one month would get the minimum monthly payment, plus a lot more, then the following 2 months you would be in default because you didn't pay the minimum amount for that month! Interest is usually accrued daily, so you want to make the payments as early as possible. Pay back as much as you can afford each month, as soon as the money comes in. When computing how much you can afford, if you haven't already done so, it may be a good idea to keep a little bit aside (at least the first few months, to build up a little security pillow), just in case you need it (you won't be able to get money back from those overpayments if you need any money for an emergency). The principal and interest are fixed, no matter how much money you throw at them. This is not correct. If I pay an extra $1000 in principal this month, then my mortgage balance is decreased. So slightly less interest accrues before my next payment. That means my next payment will be slightly more toward principal and slightly less toward interest than it would have been if I hadn't made an extra principal payment. This means that my principal will eventually drop to zero earlier than it would have if I had not made the extra payment, and I will end up making fewer total payments than I would have without the extra principal payments. Of course, the effect is even stronger if I make regular extra payments rather than a single one. Like paying off any debt, you can consider this payment essentially a risk free investment paying whatever is the interest rate on that debt. You know that by making this payment, you reduce your interest payments over the coming years by the interest rate on that amount.  Edit: In comments you said, you will pay your mortgage off earlier but you won't drop the amount required to pay each month. Look at a mortgage amortization table to see this. This isn't because of the amortization table, it's because of the contract terms between you and the lender. After you make an extra principal payment, a new amortization schedule has to be calculated one way or another. It would be possible to re-calculate a new reduced monthly payment keeping the number of payments remaining fixed. Or you can calculate a new repayment schedule keeping the total monthly payment fixed and reducing the number of payments.  It happens the banks prefer to do the 2nd of these rather than the first, so that's the terms they offer when lending. Perhaps someone more knowledgeable can comment on why they prefer that.  In any case, by reducing your principal you improve your personal balance sheet and build equity in the mortgaged property so that, for example, if you sell you'll keep more of the proceeds and use less to pay off your loan. "The reason to put more money down or accept a shorter maximum term is because the bank sweetens the deal (or fails to sour it in some fashion).  For example, typically, if there is less than 20% down, you have to pay an premium called ""Private Mortgage Insurance"", which makes it bad deal. But I see banks offering the same rate for a 15%-year mortgage as for a 30-year one, and I think: fools and their money.  Take the 30-year and, if you feel like it pay more every month.  Although why you would feel like it, I don't know, since it's very difficult to get that money back if you need it." "The simplest argument for overpayment is this: Let's suppose your fixed rate mortgage has an interest rate of 4.00%. Every £1 you can afford to overpay gives you a guaranteed effective return of 4.00% gross. Yes your monthly mortgage payment will stay the same; however, the proportion of it that's paying off interest every month will be less, and the amount that's actually going into acquiring the bricks and mortar of your home will be greater. So in a sense your returns are ""inverted"" i.e. because every £1 you overpay is £1 you don't need to keep paying 4% a year to continue borrowing. In your case this return will be locked away for a few more years, until you can remortgage the property. However, compared to some other things you could do with your excess £1s, this is a very generous and safe return that is well above the average rate of UK inflation for the past ten years. Let's compare that to some other options for your extra £1s: Cash savings: The most competitive rate I can currently find for instant access is 1.63% from ICICI. If you are prepared to lock your money away until March 2020, Melton Mowbray Building Society has a fixed rate bond that will pay you 2.60% gross. On these accounts you pay income tax at your marginal rate on any interest received. For a basic rate taxpayer that's 20%. If you're a higher rate taxpayer that means 40% of this interest is deducted as tax. In other words: assuming you pay income tax at one of these rates, to get an effective return of 4.00% on cash savings you'd have to find an account paying: Cash ISAs: these accounts are tax sheltered, so the income tax equation isn't an issue. However, the best rate I can find on a 4 year fixed rate cash ISA is 2.35% from Leeds Building Society. As you can see, it's a long way below the returns you can get from overpaying. To find returns such as that you would have to take a lot more risk with your money – for example: Stock market investments: For example, an index fund tracking the FTSE 100 (UK-listed blue chip companies) could have given you a total return of 3.62% over the last 3 years (past performance does not equal future returns). Over a longer time period this return should be better – historical performance suggests somewhere between 5 to 6% is the norm. But take a closer look and you'll see that over the last six months of 2015 this fund had a negative return of 6.11%, i.e. for a time you'd have been losing money. How would you feel about that kind of volatility? In conclusion: I understand your frustration at having locked in to a long term fixed rate (effectively insuring against rates going up), then seeing rates stay low for longer than most commentators thought. However, overpaying your mortgage is one way you can turn this situation into a pretty good deal for yourself – a 4% guaranteed return is one that most cash savers would envy. In response to comments, I've uploaded a spreadsheet that I hope will make the numbers clearer. I've used an example of owing £100k over 25 years at an unvarying 4% interest, and shown the scenarios with and without making a £100/month voluntary overpayment, assuming your lender allows this. Here's the sheet: https://www.scribd.com/doc/294640994/Mortgage-Amortization-Sheet-Mortgage-Overpayment-Comparison After one year you have made £1,200 in overpayments. You now owe £1,222.25 less than if you hadn't overpaid.  After five years you owe £6,629 less on your mortgage, having overpaid in £6,000 so far. Should you remortgage at this point that £629 is your return so far, and you also have £6k more equity in the property.  If you keep going: After 65 months you are paying more capital than interest out of your monthly payment. This takes until 93 months without overpayments. In total, if you keep up £100/month overpayment, you pay £15,533 less interest overall, and end your mortgage six years early. You can play with the spreadsheet inputs to see the effect of different overpayment amounts. Hope this helps." "Let's start with income $80K. $6,667/mo. The 28/36 rule suggests you can pay up to $1867 for the mortgage payment, and $2400/mo total debt load. Payment on the full $260K is $1337, well within the numbers. The 401(k) loan for $12,500 will cost about $126/mo (I used 4% for 10 years, the limit for the loan to buy a house) but that will also take the mortgage number down a bit.  The condo fee is low, and the numbers leave my only concern with the down payment. Have you talked to the bank? Most loans charge PMI if more than 80% loan to value (LTV). An important point here - the 28/36 rule allows for 8% (or more ) to be ""other than house debt"" so in this case a $533 student loan payment wouldn't have impacted the ability to borrow. When looking for a mortgage, you really want to be free of most debt, but not to the point where you have no down payment.  PMI can be expensive when viewed that it's an expense to carry the top 15% or so of the mortgage. Try to avoid it, the idea of a split mortgage, 80% + 15% makes sense, even if the 15% portion is at a higher rate. Let us know what the bank is offering.  I like the idea of the roommate, if $700 is reasonable it makes the numbers even better. Does the roommate have access to a lump sum of money? $700*24 is $16,800. Tell him you'll discount the 2yrs rent to $15000 if he gives you it in advance. This is 10% which is a great return with rates so low. To you it's an extra 5% down. By the way, the ratio of mortgage to income isn't fixed. Of the 28%, let's knock off 4% for tax/insurance, so a $100K earner will have $2167/mo for just the mortgage. At 6%, it will fund $361K, at 5%, $404K, at 4.5%, $427K. So, the range varies but is within your 3-5. Your ratio is below the low end, so again, I'd say the concern should be the payments, but the downpayment being so low.  By the way, taxes - If I recall correctly, Utah's state income tax is 5%, right? So about $4000 for you. Since the standard deduction on Federal taxes is $5800 this year, you probably don't itemize (unless you donate over $2K/yr, in which case, you do). This means that your mortgage interest and property tax are nearly all deductible. The combined interest and property tax will be about $17K, which in effect, will come off the top of your income. You'll start as if you made $63K or so. Can you live on that?" "As @BrenBarn points out, when people say ""they like having a mortgage because they get the benefit of writing off the interest"" they typically mean as opposed to renting. You can deduct interest and real estate (property) tax payments, as well as some closing costs in the year you purchase the home. You are also building equity (instead of helping your landlord build his or her equity).  Take for example a single person paying $1,000/month to rent an apartment. This is not deductible. He has $1,800 a year in other expenditures that would otherwise be deductible (charitable contributions, etc.), but he doesn't itemize because it isn't more than the $6,100 standard deduction, so it doesn't matter.  He takes out a mortgage for $150,000 at 6% over a 30-year term to buy a similarly-appointed home. His new mortgage payment is about $900/month, plus he puts $100/month into an escrow account for property taxes, roughly totaling his former rent payment. Over the first full year, he pays about $9,000 in deductible mortgage interest and $1,200 in deductible real estate taxes. And because he is now itemizing, he can also write off the aforementioned $1,800. At a top marginal tax rate of 25%, he shaved nearly $1,500 (.25 * (9000 + 1200 + 1800 - 6100)) off his federal income tax bill -- with the same living expenses! This is a simple example with some arbitrary numbers to prove the point, and there are a lot of other pros and cons to buying vs. renting. But again, this is probably what they mean when you hear this. Others have covered the overpaying angle, and there are a bunch of other Money.SE posts on the same or similar subjects." First, you are reading that document correctly, but it's not 78% of original mortgage. It is actually 78% of original home value.  For example, if the home was valued at $100K when you bought it and you received a $90K loan, PMI must be removed when you owe $78K, not 78% of $90K. To make matters worse for the bank, they missed the required timing to drop PMI. I would print the document you referenced, cite the applicable portion, and tell them if they do not comply, you will report them for failure to comply. For example,  I'm sure I am not the only one in this situation, and the FDIC will be   eager to assess the huge fines they can collect from a bank that isn't   operating within the law. Something like that. "I read the linked article as gef05 did, it states that the bank must stop charging PMI. But. My understanding is different. I understood that the requirement to remove PMI at sub 80 loan to value only occurred after the natural amortization time had passed. For example, you buy a $100K home, you will be at 80% LTV the day you owe 80K. This date can be calculated at the closing as you know your numbers by then. There's nothing stopping you from asking the bank to stop charging PMI sooner, but I believe they already have an end date in mind.  Besides the appraisal request, what exactly did they give as the reason they won't cancel PMI?  Edit - I just re-read the link. The line ""you show that the value of the property hasn't gone down"" makes the bank's appraisal request reasonable, IMHO." Depending on your bank you may receive an ACH discount for doing automatic withdrawals from a deposit account at that bank. Now, this depends on your bank and you need to do independent research on that topic. As far as dictating what your extra money goes towards each month (early payments, principal payments, interest payments) you need to discuss that with your bank. I'm sure it's not too difficult to find. In my experience most banks, so long as you didn't sign a contract on your mortgage where you're penalized for sending additional money, will apply extra money toward early payments, and not principal. I would suggest calling them. I know for my student loans I have to send a detailed list of my loans and in what order I want my extra payments toward each, otherwise it will be considered an early payment, or it will be spread evenly among them all. Besides the reason in @rhaskett's answer, it is important to consider that paying off a 30-year mortgage as if it was a 15-year is much more inconvenient than just paying the regular payments of a 15-year mortgage.  When you pay extra on your mortgage, some lenders do not know what to do with the extra payment, and need to be told explicitly that the extra needs to be applied toward the principal.  You might need to do this every month with every payment.  In addition, some lenders won't allow you to set up an automatic payment for more than the mortgage payment, so you might need to explicitly submit your payment with instructions for the lender each month, and then follow up each month to make sure that your payment was credited properly.  Some lenders are better about this type of thing than others, and you won't really know how much of a hassle it will be with your lender until you start making payments. If you intend to pay it off in 15 years, then just get the 15-year mortgage. This is more of an interesting question then it looks on first sight. In the USA there are some tax reliefs for mortgage payments, which we don’t have in the UK unless you are renting out the property with the mortgage.  So firstly work out the interest rate on each loan taking into account any tax reliefs, etc. Then you need to consider the charges for paying off a loan, for example often there is a charge if you pay off a mortgage.   These days in the UK, most mortgagees allow you to pay off at least 10% a year without hitting such a charge – but check your mortgage offer document. How interest is calculated when you make an early payment may be different between your loans – so check. Then you need to consider what will happen if you need another loan.   Some mortgages allow you to take back any overpayments, most don’t.  Re-mortgaging to increase the size of your mortgage often has high charges. Then there is the effect on your credit rating: paying more of a loan each month then you need to, often improves your credit rating. You also need to consider how interest rates may change, for example if you mortgage is a fixed rate but your car loan is not and you expect interest rates to rise, do the calculations based on what you expect interest rates to be over the length of the loans. However, normally it is best to pay off the loan with the highest interest rate first.  Reasons for penalties for paying of some loans in the UK. In the UK some short term loans (normally under 3 years) add on all the interest at the start of the loan, so you don’t save any interest if you pay of the loan quicker.    This is due to the banks having to cover their admin costs, and there being no admin charge to take out the loan. Fixed rate loans/mortgagees have penalties for overpayment, as otherwise when interest rates go down, people will change to other lenders, so making it a “one way bet” that the banks will always loose.   (I believe in the USA, the central bank will under right such loans, so the banks don’t take the risk.) "Based on your information...  The house is $130,000 all in (this might not be the case)  Your payment term is 30 years.  Your interest rate is about 7.35%.  Your payments are about $895.66  Your total payments will total $322,438.95  That's not a very good interest rate for a mortgage, but this might be due to poor credit or limited credit history, too low income, or too much home value being financed (or a combination of the above and other factors).  Northern Alabama may not specifically be higher interest rate: it might, honestly, just be you.  The reason that you're paying $320,000 is that you're taking $130,000 from a bank and promising to pay it back with interest. Keep in mind, that's over *thirty years.* That's a LONG time. And the bank needs to earn enough interest to combat inflation (roughly 2% annually, generally). During that time, the bank *can't* invest that money elsewhere, return it to depositors, etc.  A good rule to keep in mind is the ""rule of 72."" It's a simple trick to determine, based on an interest rate, how quickly the value of something will double (in this case, the value of your loan payments). If your interest rate was exactly 7.2%, this method would calculate 10 years until doubling.   In your case, 72 / 7.35 = 9.7959 years.   Now, you're paying off your loan simultaneously, which lowers your interest over time, so your payments total 2.48x of loan value at origination. That still sucks, but remember, it's over a loooooooooooooooooooooooooooooooooong time." If the customer pays 20% of the payment in advance, then he is he owns 20% of the house and the bank owns 80%. Now they say he pays the rest of the amount and also the rent of the house until he becomes the sole owner of the house. I think the discrepancy you are seeing is in the detail of what happens once you pay off your student loan.  If you take your monthly payment for your student loan, and apply that to your mortgage once the student loan is payed off, paying the highest interest loan will cone out ahead.   If, on the other hand, you take your student loan payment and do something else with it (not pay down your mortgage), you would be better off paying on your mortgage.  Say you have $1000 to put towards either loan, and there is 5 years to pay on the student loan, and 25 years to pay on the mortgage.  By paying on the student loan you are, roughly, saving 5 years of 5% interest on that $1000.  By paying on the mortgage, you are saving 25 years of 3% interest. Simply put, for a mortgage, interest is charged only on the balance as well. Think of it this way - on a $100K 6% loan, on day one, 1/2% is $500, and the payment is just under $600, so barely $100 goes to principal. But the last payment of $600 is nearly all principal.  By the way, you are welcome to make extra principal payments along with the payment due each month. An extra $244 in this example, paid each and every month, will drop the term to just 15 years. Think about that, 40% higher payment, all attacking the principal, and you cut the term by 1/2 the time.