Adjust Your Extra Principal Automatic Mortgage Payment When Rates Rise

I realized something important for all of you who have automatic mortgage payments and also like to automatically pay down extra principal each month. It is don’t forget to adjust your mortgage autopay amount down when rates increase.

When I refinanced a primary residence loan in 2019, I decided to get a 7/1 ARM at 2.625% with no fees. I had gotten a 5/1 ARM when I purchased the house in 2014 for 2.875% and I wanted to refinance before the rate reset.

Given I have an ARM, I always like to pay extra principal with each mortgage payment. So instead of making the regular $2,814.14 mortgage payment, I decided to pay $4,500 automatically each month.

$4,500 is a nice even number which pays $1,685.59 extra toward principal. This amount is on top of the $1,847 (goes up every month) that is already going to principal from the $2,814.14 mortgage payment. Not bad since the mortgage rate is so low.

Not only do I like taking out cheap debt to live a better lifestyle, I also like the feeling of paying down debt. Automatically paying down extra principal each month ensures I am making financial progress, even if I didn’t do anything else.

Over time, the extra forced savings from paying down more principal adds up! And when you’re finally done paying off your mortgage, you own a nice asset that can be rented out for cash flow.

Why Adjusting Your Automatic Mortgage Payment Is Important

Reviewing my mortgage payment history since 2019, I have consistently paid $4,500 since the beginning.

Most people just pay the mortgage amount each month, but not me. And maybe not those of you who like to accelerate your debt repayment as well.

However, since 2019, mortgage rates have surged higher thanks to the pandemic, government stimulus, supply chain issues, and the strong economy. Since 2021, I’ve also written posts such as:

In other words, even though I was recommending to not pay down extra toward a mortgage in a high mortgage rate, high interest rate, high inflation, and inverted yield curve environment, I was doing just that!

As someone who tries to act congruently with my beliefs, I was surprised to learn I had missed this financial move. As soon as I realized my inconsistency, I called the bank and had them lower my payment from $4,500 down to $2,814.14.

Paying down extra principal when the yield curve is inverted is suboptimal because you reduce liquidity in the face of a potential recession. If bad times return, you want as much cash flow and liquidity as possible to survive.

Paying down extra principal is also suboptimal when Treasury bond yields and inflation are high. You could earn a greater return risk-free and inflation is already paying down debt for you.

Why I Missed Lowering My Mortgage Payment

With over 40 financial accounts to manage, it’s easy to miss things. I set up automatic payments for everything to eliminate missing payments. But the downside is that I sometimes fail to adjust my payments when conditions change.

The more complicated your net worth, the more you will miss things. There might be some big winner stock you’ve been holding for years that’s now in the gutter. It’s easy to lose track.

This is why tracking your net worth diligently using Empower or another free wealth management tool is important. Having at least a quarterly, if not monthly financial checkup, is important.

Don't forget to adjust extra mortgage principal payments as interest rates change

Benefits Of Autopay And Paying Down Extra Debt

Paying an extra $1,685.59 toward principal for 48 months ($80,908.32) isn’t the end of the world. I now have $80,908.32 less mortgage debt for this one property. I’ve accelerated the time to completely pay off the mortgage by several years.

However, from March 2022 until August 2023, I could have earned a guaranteed 4% – 5.5% return in Treasuries. This return compares favorably to the 2.625% return I made paying off the debt.

There is also another benefit to paying off a negative real estate rate mortgage, and that is saving money from a potential bear market. The extra mortgage principal payments I made in 2022 saved me from a ~20% loss plus the 2.625% in mortgage interest expense.

If I had never remembered to adjust my mortgage autopay, things would still be fine. I would simply have a lower principal balance in 2026, when my ARM resets.

I know only about 11% of mortgage holders have an ARM. However, if you get an ARM to save money, you might be more inclined to pay off your mortgage quicker. With a 30-year fixed mortgage, there is no sense of urgency to pay extra toward principal. So you tend not to.

ARMs as a percentage share of all mortgages

It’s optimal to stop paying down extra principal automatically each month when rates are high and the yield curve is inverted. Therefore, the logical conclusion is to resume paying down extra principal when rates are low and the yield curve is upward sloping.

Specifically, I would resume paying down extra principal automatically when Treasury bond yields are equal to or less than your mortgage rate. The lower the 10-year Treasury bond yield is below your mortgage rate, the more you want to pay down extra principal.

Another time to start paying down extra principal automatically is when your cash flow and savings amount is strong, and you don’t know where to invest the extra cash.

When in doubt, pay down debt.

We Will Earn, Save, And Invest More If We Want To

One final takeaway from this post is that most of us will rationally take action to improve our finances if we need to. Therefore, I wouldn’t worry too much about being permanently stuck financially.

I found this mortgage payment mismatch because I was motivated to find more ways to improve cash flow. We are in the process of buying another house. In addition, there is the potential for another recession.

As a result, I reviewed all our expenditures and realized this was the one expenditure that could free up a significant amount of cash flow ($20,227/year). I’ve also thought about going back to work to boost income and reduce healthcare expenses.

If I didn’t feel the need to boost our finances, I probably wouldn’t have connected the dots about this automatic mortgage overpayment. But I would have if I found myself in a cash crunch.

If we need more money, we’ll find a way to save more, slash costs, and/or earn more. This logical behavior is a win for us all.

Reader Questions And Suggestions

Do you pay extra principal through your automatic mortgage payments? If so, how much more do you decide to pay? Have you remembered to lower your extra principal payments once risk-free rates surpassed your mortgage interest rate? Are you trying to improve cash flow due to another potential recession?

If you’re shopping around for a mortgage, check out Credible, a mortgage market place where you can find personalized prequalified rates. Credible has a handful of lenders on its platform competing for your business.

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