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Old 11-17-2008, 10:40 AM
 
Location: Denver
3,139 posts, read 6,905,145 times
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Does makiing extra payments on a mortgage change the amortization schdule?

I was wondering if you made extra payments if that would increase the ammount of principle paid with each regular payment?

Thanks
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Old 11-17-2008, 10:50 AM
 
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no, making extra payments does not change how much interest you are paying each month on a mortgage. the extra payments just reduce the principal amount so you pay the loan off faster.
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Old 11-17-2008, 11:01 AM
 
Location: San Jose, CA
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On a 30yr fixed mortgage, or any other fixed rate mortgage with a definite amortization schedule (not IO or Pay option), the answer is yes.

The amount of interest you pay every month is simply the amount of interest accumulated on the loan since your last payment. If you in 2 years you will owe $200,000 on your mortgage using the amortization schedule, and your interest rate is 6% you will accumulate roughly $1000 of interest in that one month 2yrs from now, if by making extra payments you get it down to $190,000 you will accumulate about $950 in that one month. So your regular payment will include $50 more toward principal and $50 less toward interest. So yes it does affect the amount of interest you pay.
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Old 11-17-2008, 12:22 PM
 
Location: Denver
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Ahhh very interesting. I was thinking the amortization of the loan was set in stone. So instead of making extra payments you could just take the extra payment money and put it in CDs so at least it is making money.

But if making extra payments actually changes the amortization with each extra payment that is great. Thanks!
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Old 11-17-2008, 12:47 PM
 
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the payment is set in stone but the interest due is based on the principle... as you pay the balance down, less interest is owed each month so more of your payment is going to principle
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Old 11-17-2008, 01:09 PM
 
Location: Fort Myers, FL
1,286 posts, read 2,594,965 times
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Quote:
Originally Posted by wankel7 View Post
Ahhh very interesting. I was thinking the amortization of the loan was set in stone. So instead of making extra payments you could just take the extra payment money and put it in CDs so at least it is making money.

But if making extra payments actually changes the amortization with each extra payment that is great. Thanks!
yes it changes the schedule and quite dramatically i might add. your payments will always stay the same, but your balance due will drop.

with cd's you can make money, however you are faced with income tax on that money made, plus the current rate of inflation. often times you will actually end up paying to have your money in this situation. i think the best rates for cd's currently is around 4.5% assuming you have the $50k to get that. you will never receive as much as you would save with the current cd rates.

for example, on a loan of $100,000 with a 30 year mortgage, you would pay a total of $215,000 and change. that is $115,000 just in interest alone!

with the same loan amount over 30 years, paying just $100 extra each month saves you $39,000 paid off in 21 years.

or how about $200 = saves you $58,000 paid off in 16.4 years

or how about $500 = saves you $82,000 loan paid off in 10.2 years

you see how this works? not to mention the tax write-offs you get.

think of it this way, your payments are based on the loan amount due at your interest rate. now you lower the balance by making extra payments and your balance due changes.
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Old 11-18-2008, 08:33 AM
 
Location: Charlotte, North Carolina
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1. Paying extra on a fixed rate mortgage WILL drop the amount of interest paid throughout the lifetime of the loan. If you make extra payments this will shorten the term, and cut your interest paid on the loan by a lot. I believe 1 extra payment per year will cut about 5-6 years off a 30yr fixed loan. Extra payments will NOT lower your monthly payments.

2. Paying extra on a interest only mortgage WILL drop the amount of interest paid monthly and throughout the lifetime of the loan. It is better to have an I/O loan to pay lower interest since a regular fixed rate mortgage is 'front loaded' with interest in the first 10 yrs of payments. Extra payments WILL lower your monthly payments.

Is now the time to make extra payments?
I dont think so.
Home values are still dropping, and you will be investing in a nest egg that may not appreciate for a long time.
If you have paid off your cars, revolving debts, and installment loans then I would start saving. If you have enough reserves then I would start paying off the mortgage.
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Old 11-18-2008, 11:28 AM
 
Location: Apple Valley Calif
7,475 posts, read 19,569,061 times
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Quote:
Originally Posted by wankel7 View Post
Does makiing extra payments on a mortgage change the amortization schdule?

I was wondering if you made extra payments if that would increase the ammount of principle paid with each regular payment?

Thanks
Paying extra makes a huge difference in the length of time you will pay, and on the amount of interest you will pay.
My daughter has a small loan on her condi, only $65 k.
At 6%, her payments were $432. a month. She will pay for 30 years, and pay $140,000 in interst over that period of time.
We added an extra amout to her payment, and rounded her payment to $550. a month. That extra $118 a month means she will now pay off the loan in 17 years, and pay $103,000 in interest..!
That means she will cut 13 years in time, and $37,000 in interest off of her loan.
Here's a great table, you can plug in any figure you want, and see the savings...
AMORTIZATION TABLE
A little extra each month makes a huge difference....
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Old 11-18-2008, 03:25 PM
 
Location: Sugar Land, TX, USA
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i did this with my previous house. I had a 15 year fixed mortgage and was able to pay it off in 8 years by making an extra large payment once a year. It was a lot less hassle when I needed to sell the house. I have a 15 year note on my new house too and plan to do the same thing...but will probably wait a few years to pay extra...right now cash is king, so i am saving it for an emergency/rainy day.
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Old 11-23-2008, 11:44 PM
 
Location: Cary, NC
1,036 posts, read 3,627,833 times
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If you do make extra payments to the mortgage, your rate of return is roughly equal to the interest rate on the loan on a fixed mortgage. For example, on a 30 year loan fixed at 6%... if you pay $100 extra this month you are getting a 6% rate of return on that.

So the question then becomes... can you invest those $100 into something that will make you >6% interest?


The other factors to consider are that mortgage interest is tax deductible (the higher your tax bracket the better it is to have a mortgage) and that income on investments are taxable (so if you earn 10% in the stock market, its not 10% after taxes and trading fees).

These days with both the housing and stock markets at risk, the best bet is to save the money in a safe, secure and liquid asset. Something you can conserve principle and tap in case of emergencies. If you want to take on more risk for potential reward, you can judge if paying down your mortgage or investing elsewhere is a better strategy.
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