06092018, 09:57 AM



3,533 posts, read 1,985,593 times
Reputation: 6118


Let’s say the following hypothetical situation occurs. A person takes out a new mortgage on a home; a 30 year fixed rate loan at 4.5% with a fixed P&I payment of $2000 per month (simplicity sake). That same individual received a $5k after tax bonus at work the same month and would like to make and early extra principal payment above normal monthlys.
Now when that person was at closing he asked the title officer this question and received an answer along the lines of... oh that is a great decision the lender will apply the balance to the back end of the loan and it will help you pay off the loan much earlier if you do that.
The person replied my concern isn’t around timing of loan repayment but of interest savings. Does the loan interest basis get recalculated dynamically or is the saving only at the back end of the loan? If you look at a 30 year mortgage amortization table the interest is like 85% of total payment at the front end and it flips towards the back end. So if the payment is only applied to the back end is the interest savings only for. The back end as well? The couldn’t answer it properly.
So when computing the savings is the interest savings only 5000 * .045 or is it 5000 * .045^30 ?
Do lenders take the early payments and reduce the outstanding balance of the loan thereby reducing the interest rate basis? Or it is like the loan officer said that it’s applied at the back end and the savings is 4.5% of 5000 30 years from now?

06092018, 10:09 AM



Location: BrawndoThirstMutilatorNation
15,147 posts, read 15,198,298 times
Reputation: 10872


I believe that if you want the whole financialbasis of your loan recalculated after a principalpayment, you have to pay a fee to have it reamortized. Not all loans have this option, you may have to go through a complete rewrite of the loan.

06092018, 12:28 PM



Location: Phoenix, AZ
1,226 posts, read 477,838 times
Reputation: 2802


The amount borrowed on a30 year fixed rate loan at 4.5% with a fixed P&I payment of $2000 per month is $394,722.21.
The total interest paid over the life of the loan (360 months) is $325,277.68.
By the time you make your first payment you have already accrued a month's interest of $519.79. $1480.21 goes to principal.
If you add $5000 to the first payment you reduce your principal by $6480.21 leaving a balance of $388, 242.11
Now recalculate $388,242.11 (continuing to pay $2000 per month after that).
You have reduced the remaining payments to 348 months and the total interest for the life of the loan to $307,556.05 + $519.79 = $308075.84 a savings of $17201.84
You can use this amortization calculator to play around with the figures.
Mortgage/Loan Calculator with Amortization Schedule

06092018, 02:04 PM



10,265 posts, read 6,491,094 times
Reputation: 10837


https://www.fidelity.com/mymoney/sav...tgageinterest
When a bank lends you money to buy a home, it does so to profit. The sooner you pay down your principal, the less money you'll lose to interest

https://money.stackexchange.com/ques...foreprincipal
Banks don't make you pay different amount of principal at different stages of the mortgage. It's a consequence of how much principal is left.
The way it works is that you always pay off interest first, and then any excess goes to pay off the principal. However early in the mortgage there is more interest, and so less of the payments go toward principal. Later in the mortgage there is less interest, so more of the payments go to principal.
If you didn't do that  say if more of your payments went to pay down principal early on  then you would find that the interest wasn't being all paid off. That interest would be added to the principal, which means your principal wouldn't be decreasing by the full amount you paid off. In fact the effect would be exactly the same as if you had paid off interest first.

06092018, 02:16 PM



10,265 posts, read 6,491,094 times
Reputation: 10837


Lets say the home was $395K like the other person said for it to be $2K in P and I.
the payments are all balanced out to calculate your 360 payments at that interest rate. The faster you pay off the principal the less interest you will pay and the less time it will take to make the payoff.
At any point online or on a monthly mortgage statement by mail it will tell you how much in total you have if you want to make a lump sum payment. lets say you owe 800K with about half principal and half interest.
lets say after a year you will a million.. You can pay the remaining amount 380K or whatever it is and not owe any of the interest.

06092018, 02:18 PM



10,265 posts, read 6,491,094 times
Reputation: 10837


Extra Payments Are More Valuable Early On
You get more value out of extra mortgage payments
Early in the loan term
Because knocking down the outstanding balance earlier
Means less interest accrues
https://www.thetruthaboutmortgage.co...gagepayments/
So yes, you can pay less interest if you pay more principal early on.
You can even get a 30 year loan and make extra payments if your income increases lowering it to a 15 year loan and save a fortune in interest.

06092018, 02:30 PM



10,265 posts, read 6,491,094 times
Reputation: 10837


Quote:
Originally Posted by SWFL_Native
Do lenders take the early payments and reduce the outstanding balance of the loan thereby reducing the interest rate basis? Or it is like the loan officer said that it’s applied at the back end and the savings is 4.5% of 5000 30 years from now?

Yes the principal amount due would go down by 5k saving you $5K princial's worth of interest over 30 years.
Last edited by LifeIsGood01; 06092018 at 02:55 PM..

06092018, 02:52 PM



10,265 posts, read 6,491,094 times
Reputation: 10837


I did a calculation and it tells you how much you save if you pay $5k early on.
Term of the loan: 30 Years  Loan amount: $295,000.00  Interest rate: 4.500%
Starting date of the loan: August, 2018
Monthly mortgage payments: $1,494.72
Prepayments
One time prepayment of $5,000.00 in August, 2018
Calculation Results
Total interest paid over the life of the loan (no prepayment): $243,099.79
Total interest paid over the life of the loan (with prepayment): $229,345.35
Your Savings:
Total interest saved: $13,754.44
1 years and 0 months shorter loan

06092018, 10:02 PM



3,533 posts, read 1,985,593 times
Reputation: 6118


Quote:
Originally Posted by LifeIsGood01
Yes the principal amount due would go down by 5k saving you $5K princial's worth of interest over 30 years.

Thank you! That’s all I needed to know.... they kept saying the $5k would be applied toward the back of the loan. I really didn’t care if that shaved off year 30 to 29.5 of the mortgage. What I wanted to know was if the interest rate savings compounded or not. As other posters have said here you may have to pay a fee for a recalc of the Loan. I certainly don’t want to do that.

06102018, 06:11 AM



10,265 posts, read 6,491,094 times
Reputation: 10837


Quote:
Originally Posted by SWFL_Native
Thank you! That’s all I needed to know.... they kept saying the $5k would be applied toward the back of the loan. I really didn’t care if that shaved off year 30 to 29.5 of the mortgage. What I wanted to know was if the interest rate savings compounded or not. As other posters have said here you may have to pay a fee for a recalc of the Loan. I certainly don’t want to do that.

I think you mean recasting. Which is paying the $5K to reduce your monthly payments and the interest on the $5K instead of doing it by shortening your loan, and if they allow that you do pay for it.
Recasting doesn’t reduce the length of your mortgage, just how much you pay each month.https://www.bankrate.com/finance/mor...ydoit1.aspx
Making a large early payment on your mortgage will reduce the amount of interest you pay on your loan. You’ll have a smaller loan balance, and interest is charged against your loan balance, so you’ll pay less. Over many years, this will result in significant savings – especially if you’re in the early years of a longterm loan like a 30year mortgage https://www.thebalance.com/whyismy...sohigh315666
So paying extra principal early on does mean you will pay less interest over the life of the loan. Your payments will stay the same for P and I but you will be done paying the mortgage off earlier and save on interest.
Banks don't want your to pay extra because they get less money on interest, that's why they don't explain it and say it's off the back end.
Last edited by LifeIsGood01; 06102018 at 06:24 AM..

Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: Citydata.com.

