If you’re someone who uses automatic mortgage payments and habitually makes extra payments towards the principal each month, here’s something critical to keep in mind: Don’t neglect to lower your mortgage autopay amount when interest rates go up.
Let’s explore this through my experience. In 2019, I refinanced my primary residence loan, opting for a 7/1 ARM at 2.625% without any additional fees. Previously, I had a 5/1 ARM at 2.875% when I bought the house in 2014, and I wanted to refinance before the rate adjusted.
Given that I had an ARM, I had always preferred to pay extra principal with each mortgage payment. Instead of sticking to the regular mortgage payment of $2,814.14, I chose to automatically pay $4,500 each month.
This amount is attractive, as it allowed me to pay an extra $1,685.59 towards the principal on top of the $1,847 (which increases every month) that was already part of the regular mortgage payment. With such a low mortgage rate, this was a good deal.
I’ve always enjoyed both leveraging inexpensive debt to enhance my lifestyle and the satisfaction of reducing debt. Making automatic extra principal payments each month ensured that I was progressing financially, even if I made no other moves.
These additional savings from paying more principal accumulate over time, and once you’ve fully paid off your mortgage, you possess a valuable asset that can generate rental income.
Don’t Overlook Adjusting Your Mortgage Automatic Payment When Rates Shift
The Significance of Modifying Your Automatic Mortgage Payment
Since 2019, I consistently paid $4,500 monthly on my mortgage. Most homeowners just cover the monthly mortgage amount, but I liked to accelerate my debt repayment. Perhaps you do as well.
However, mortgage rates have risen sharply since 2019 due to various factors, including the pandemic, government stimulus, supply chain challenges, and a robust economy. I even wrote posts warning against paying extra on mortgages during high interest rate periods. Surprisingly, I found myself doing exactly that!
This inconsistency caught my attention, so I immediately contacted the bank to reduce my payment from $4,500 to $2,814.14.
Paying extra principal when facing an inverted yield curve or high inflation is suboptimal as it decreases your liquidity in uncertain times or when better investment opportunities arise.
Why I Overlooked Reducing My Mortgage Payment
Managing over 40 financial accounts, it’s easy for something to slip through the cracks. Automatic payments prevent missed payments, but they also mean I occasionally overlook adjustments when circumstances change.
Tracking your net worth carefully and conducting regular financial check-ups can prevent such oversights.
Benefits and Cautions Regarding Autopay and Extra Debt Repayment
Paying an extra $1,685.59 towards the principal for 48 months (totaling $80,908.32) isn’t catastrophic. In fact, it’s reduced my mortgage debt significantly for that property and shortened the time to complete payment by years.
However, from March 2022 to August 2023, I could have earned a guaranteed 4% – 5.5% return in Treasuries, a more favorable rate compared to the 2.625% gained from paying off the debt.
In addition, by focusing on a negative real estate rate mortgage, I saved money from a potential bear market in 2022.
But if I hadn’t remembered to change my autopay, things would still be okay. By 2026, when my ARM resets, I would simply have a lower principal balance.
For those with an ARM, or Adjustable Rate Mortgage, there may be a greater inclination to pay off the mortgage quicker. With a traditional 30-year fixed mortgage, there’s often no urgent sense to pay extra towards the principal.
When to Consider Resuming Extra Principal Payments
The optimal time to stop automatic extra principal payments is when rates are high, and the yield curve is inverted. Conversely, it may be wise to resume these payments when rates are low, and the yield curve is upward sloping.
Other factors to consider include the comparison between Treasury bond yields and your mortgage rate and your financial situation and investment opportunities.
The Flexibility to Adapt Financially
A final insight from this experience is that we often make rational financial decisions when necessary. So, don’t be overly concerned about being permanently financially stuck.
My discovery of this mortgage payment oversight came from a desire to improve cash flow. If we need more money, we’ll find ways to save, cut costs, or earn more. This adaptability is a triumph for all of us.
