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Magazine Features
Pay Extra on Debt with Separate Check?
by Dave Ramsey
When paying extra on a car note or mortgage payment is it a good idea to write a separate check?
Dear Dave,
When paying extra on a car note or mortgage payment is it a good idea to write a separate check?
Scotty
Dear Scotty,
Absolutely! You can include the extra check in a separate envelope with the regular payment, but make sure you write "principle only" in big, bold letters on the envelope and on the check. Also, include the account number in the notation line at the bottom of the check.
Some companies use payment booklets that have a box specifically for entering any amount you want applied directly to the principle. This method is okay, too. Just make sure you keep a good, solid record of the monthly and overall amount you've designated to be applied only to the principle.
Trust me, follow these guidelines and you'll be much less likely to run into a sticky situation because some bozo threw the check into an escrow account or chalked it up as a pre-paid payment!
- Dave
* For more financial help please visit daveramsey.com.
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K in California
I have been adding extra to my monthly mortgage payment to equal an extra payment each year. I do this through online banking. Are you saying that it's better to make a small, second payment each month rather than adding it to my regular payment? K
Eileen in Pioneer, CA
We make an additional principal payment each year but it is paid monthly through our bank by electronic fund transfer (EFT) along with our regular payment. On the statement from the bank they show the additional principal payment separately. So, everything is good. I heard that we will save about seven years' interest by paying it off early.
Paula in California
I have been prepaying on my mortgage for the past 6 years, and about half of my additional principle payments, no matter how they mark them, get mis-applied. Most recently, I took the payment directly to my local branch, repeated to the teller who was processing it SEVERAL TIMES that this payment was principle only, the regular payment for that month had already been made--but part of the payment was still applied to future payments. I always check my accounts to see when and how a payment posts, and if it has been mis-applied I call the company and have them do a reversal. I am convinced that this bank, in spite of its written policy that additional funds will go first to any late fees etc. then to principle, actually has a policy of applying funds to future payments because that way they get more interest money. I've had similar problems with my student loans at a separate bank. The lesson: follow up, especially when making large additional principle payments. The bank is watching out for themselves, not for you.