I love answering reader questions. Here is one question I received recently:
My husband and I have a simple interest personal loan through our bank,
Wachovia, for our mortgage. What is the best way to reduce the
principal with this type of loan? The interest is 5.75%.
First of all — Wow. What a score. A personal loan at 5.75% for a mortgage? That’s good stuff.
The best way to reduce your principal is to make extra payments. Whether you pay monthly, quarterly or annually, make extra payments on the principal. One way to do this and ensure that money goes exactly where you want it to is to make the extra payment by separate check. In the memo line, write something to this effect: “Apply to principal only.” Your regular mortgage payment will cover the interest.
However, some of my die-hard investing friends would tell you that the extra money would be better served in some sort of an investment account with average returns of 8% to 11%.