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Old 06-09-2018, 09:57 AM
 
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Letís 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 isnít 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 couldnít 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 itís applied at the back end and the savings is 4.5% of 5000 30 years from now?
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Old 06-09-2018, 10:09 AM
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Location: USA, love-it or leave-it Baby!!!!
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I believe that if you want the whole financial-basis of your loan recalculated after a principal-payment, 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.
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Old 06-09-2018, 12:28 PM
 
Location: Phoenix, AZ
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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
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Old 06-09-2018, 02:04 PM
 
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https://www.fidelity.com/mymoney/sav...tgage-interest

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...fore-principal

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.
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Old 06-09-2018, 02:16 PM
 
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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.
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Old 06-09-2018, 02:18 PM
 
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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...gage-payments/

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.
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Old 06-09-2018, 02:30 PM
 
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Quote:
Originally Posted by SWFL_Native View Post

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; 06-09-2018 at 02:55 PM..
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Old 06-09-2018, 02:52 PM
 
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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 pre-payment): $243,099.79
Total interest paid over the life of the loan (with pre-payment): $229,345.35
Your Savings:
Total interest saved: $13,754.44
1 years and 0 months shorter loan
Attached Thumbnails
Mortgage Principal Payment-final-summary..png  
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Old 06-09-2018, 10:02 PM
 
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Quote:
Originally Posted by LifeIsGood01 View Post
Yes the principal amount due would go down by 5k saving you $5K princial's worth of interest over 30 years.
Thank you! Thatís all I needed to know.... they kept saying the $5k would be applied toward the back of the loan. I really didnít 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 donít want to do that.
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Old 06-10-2018, 06:11 AM
 
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Quote:
Originally Posted by SWFL_Native View Post
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...y-do-it-1.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 long-term loan like a 30-year mortgage https://www.thebalance.com/why-is-my...so-high-315666

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; 06-10-2018 at 06:24 AM..
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