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I keep reading all of these mortgage posts about how it helps to make 1 extra mortgage payment a year.
My mortgage is about $2400 per month. So that would be an additional $2400 a year.
My question is regarding making intense mortgage payments. I am thinking about making an extra payment towards the principal of $1000 - $1500 per MONTH. Totaling an extra $12000 - $18000 per year in Principal payment.
I understand I will shorten the life of the loan. But will this effectively lessen the amount of interest I am paying?
I am paying about $1040 a month in interest for the next 2 years. (it drops $2 in interest per month) IT is crazy. I just completed my first year of the loan.
Example:
5/1/2015 My interest is $1043.40
5/1/2016 My interest is $1024.19
5/1/2017 My interest is $1004.08
After 3 years on regular payment schedule it dropped about 39 bucks. So I would like to start making INTENSE payments.
If I start making these extra payments towards principal will the computed interest due DROP significantly right away in the first few months?
Last edited by mulliganx; 04-13-2015 at 10:20 AM..
I keep reading all of these mortgage posts about how it helps to make 1 extra mortgage payment a year.
My mortgage is about $2400 per month. So that would be an additional $2400 a year.
My question is regarding making intense mortgage payments. I am thinking about making an extra payment towards the principal of $1000 - $1500 per MONTH. Totaling an extra $12000 - $18000 per year in Principal payment.
I understand I will shorten the life of the loan. But will this effectively lessen the amount of interest I am paying?
I am paying about $1040 a month in interest for the next 2 years. (it drops $2 in interest per month) IT is crazy. I just completed my first year of the loan.
Example:
5/1/2015 My interest is $1043.40
5/1/2016 My interest is $1024.19
5/1/2017 My interest is $1004.08
After 3 years on regular payment schedule it dropped about 39 bucks. So I would like to start making INTENSE payments.
If I start making these extra payments towards principal will the computed interest due DROP significantly right away in the first few months?
Assuming you have Excel, it's very easy to put together an Amortization Schedule to get your exact numbers(or there are plenty of calculators online if you do a quick google search).
To answer your question though, yes it will cut down on the interest. Every month, you make a payment of $X,XXX. Separate from that, the Interest is calculated by applying the monthly rate to the outstanding Principal Balance(let's call this $YYY in interst). That Y number is calculated each month and changes as the principal goes down.
Payment - Interest = the Amount paid towards your Principal
$X,XXX - $YYY = $ZZZ
Your $X,XXX remains unchanged, but when the principal goes down, it means next month, $YYY is smaller because the same Interest % is applied to a smaller balance. Because of that, more money goes towards paying off the loan and you pay it off sooner.
So A) Yes, it will reduce the interest you pay each month, but B) it will also reduce the time you are paying interest, which also means less total interest.
I understand I will shorten the life of the loan. But will this effectively lessen the amount of interest I am paying?
Yes it will. Someone posted a link in another thread about this to a really neat excel amortization table, where you could plug in extra principal payments and see exactly the effect it would have on your loan amortization.
Just out of curiosity - what interest rate did you get on this mortgage and what is the term? If you can afford these higher payments (easily), you might be better off doing a refi into a 15 year with a lower interest rate.
Personally, I am retired with a 3.75% 30 year mortgage on a home we purchased 2.5 years ago. We could have paid cash. Why did we get a mortgage? Because the mortgage interest is deductible, which brings down the 3.75% to a 'lower' percentage. Because I can keep OUR cash in OUR investments, making money for US, rather than the bank (and yes, we are easily beating 3.75% with our investment portfolio).
Will we pay it off later? Maybe. But with these low rates, I doubt it.
Just out of curiosity - what interest rate did you get on this mortgage and what is the term? If you can afford these higher payments (easily), you might be better off doing a refi into a 15 year with a lower interest rate.
Personally, I am retired with a 3.75% 30 year mortgage on a home we purchased 2.5 years ago. We could have paid cash. Why did we get a mortgage? Because the mortgage interest is deductible, which brings down the 3.75% to a 'lower' percentage. Because I can keep OUR cash in OUR investments, making money for US, rather than the bank (and yes, we are easily beating 3.75% with our investment portfolio).
Will we pay it off later? Maybe. But with these low rates, I doubt it.
Do you have a pension also, or are you assuming that the investments will perform well enough to pay the note without being forced to sell at a loss?
Do you have a pension also, or are you assuming that the investments will perform well enough to pay the note without being forced to sell at a loss?
No pension. Significant IRA's and Social Security. Performing very well (thank you) in a highly diversified mutual fund portfolio that can be invested into something else (like cash) in minutes. We could pay off the mortgage immediately, if we wanted, without any penalty on the IRA's (just the standard personal income taxes on the withdrawal).
But the overall earnings in those IRA's (plus the tax sheltered status of an IRA) make it financially foolish to pay them off. Unless, of course, we mentally wanted to pay them off. For many, having the psychological security of a paid off house is more important than anything. I understand that, and we are open to reconsidering our position as we get older.
I openly admit we are very blessed to have such choices. And grateful.
No pension. Significant IRA's and Social Security. Performing very well (thank you) in a highly diversified mutual fund portfolio that can be invested into something else (like cash) in minutes. We could pay off the mortgage immediately, if we wanted, without any penalty on the IRA's (just the standard personal income taxes on the withdrawal).
But the overall earnings in those IRA's (plus the tax sheltered status of an IRA) make it financially foolish to pay them off. Unless, of course, we mentally wanted to pay them off. For many, having the psychological security of a paid off house is more important than anything. I understand that, and we are open to reconsidering our position as we get older.
I openly admit we are very blessed to have such choices. And grateful.
Yeah, it would be a bad move to pull out enough to pay the house off in a lump sum, and get into the (insert expletive of choice here) tax bracket.
But it might make sense to pull smaller amounts out from the bond allocation and pay it down, since bonds are not likely to return enough to keep up with the interest.
Future interests are discounted at the time value of money rate which typically covers inflation and more. So If your interest rate is 4% and inflation is 2%, your effective interest is lower than 2%. At this rate, accelerating payments doesn't really save you much.
Low interest rates makes the impact of paying extra principal small, dumping extra money in your retirement fund would more than likely have a better return than making intense payments on your mortgage.
As long as you are making "Principal" payments, the computed interest is calculated just on the remaining balance, so yes you are going to pay less interest as so as you make your intense payments.
If you are going to make those intense payments anyways, consider doing a 15 year fixed or an ARM depending on your equity or cashflow needs.
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