Mortgage prepayment question

Hello, I have a question regarding early payoff of mortgages, and the payments.

If I have a mortgage (110k) and monthly computed interest and principle payments are (briefly) shown on this amortization schedule..

Due Date Int. Princ. Def.Int. Pr-Def Int Outstanding

4/01/2008 $610.36 $102.02 $0.00 $110,453.33 $110,453.33 05/01/2008 $609.79 $102.59 $0.00 $110,350.74 $110,350.74 06/01/2008 $609.23 $103.15 $0.00 $110,247.59 $110,247.59 07/01/2008 $608.66 $103.72 $0.00 $110,143.87 $110,143.87 08/01/2008 $608.09 $104.29 $0.00 $110,039.58 $110,039.58 09/01/2008 $607.51 $104.87 $0.00 $109,934.71 $109,934.71 10/01/2008 $606.93 $105.45 $0.00 $109,829.26 $109,829.26 11/01/2008 $606.35 $106.03 $0.00 $109,723.23 $109,723.23 12/01/2008 $605.76 $106.62 $0.00 $109,616.61 $109,616.61

If on 4/01 I were to pay the $610.36 + 102.02 (int and principle due) PLUS make an additional principle-only payment of 624.07 (sum total of 05/08 up to and including 10/08 principle payments), doesn't this effectively knock 6 months off my mortgage and accelerate this amortization schedule so that I am pretty much, on 05/08, making the payment that I would have made on 11/08?

Am I reading this right, that I can knock six months off my mortgage right now for $624?

Thanks for any help, Mike

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
Mike
Loading thread data ...

[current interest payment $610 and principal payment $102]

Yes. That's 6 months worth of principal. You could knock off the entirety of your remaining mortgage payments by paying off *all* the remaining principal. Same idea.

Note that over time, the principal portion gets larger.

6 months worth of principal right now might be $624, but the next 6 months worth of principal will be somewhat higher. Your last 6 months of $712 payments will be almost entirely principal. If you had only 6 months left on that mortgage and wanted to speed it up by 6 months, you'd have to come up with the entire remaining balance - which at that point will be approx $4200, not $624.

Look at the far end of your amortization schedule.

Reply to
BreadWithSpam

Yes. You are correct as long as you specify the extra money goes to principal. If paying the mortgage early is your goal, this is a great way to view it. But at you get further down the road, that extra $600 may only pull you ahead three months, then just 2, etc., as your principal portion is larger. You discovered one pretty painless way to prepay, just pay the next principal portion. This cuts the mortgage in half and payments only rise slowly over the years. Joe

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
joetaxpayer

Okay, I just wanted to make sure I understood the concept right... it seemed right, but it seemed too easy.

Thanks, Mike

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
Mike

Look at it this way. If you compound the $102 for 30 years at 6.7%/yr or so, it grows to $712. i.e. if you invest it at exactly the rate of your mortgage, you'll have it match that last payment. Joe

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
joetaxpayer

It isn't as easy as it might seem. That money you avoid paying is not a savings. In fact, if you can invest your prepayment amount in something that returns more, like the stock market over time, prepaying can actually cost you far more than what you save. You also give up some of the tax deduction.

-john-

Reply to
John A. Weeks III

Yes it isd that simple. If you pay "next months principal" you will pay off mortgage in 15 years, not 30 (or in half the time).

If you want to accelerate even further, pay the principal amount on the last payment (so if 30 year fixed, make principal payment on payment 360 with month 1, 359 with month 2, 358 with month 3...

If you invest the extra payment, you will often come ahead "net worth" wise, assuming a little more risk (than paying off mortgage early) with more liquidity as a significant benefit to taking on that risk and more net worth as the most common benefit of taking on that risk.

======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
jIM

For those who lack the skill to write a spreadsheet, or if they do not own a TI BA-35, the method the OP suggested, paying next principle and staying in sequence, is really the only way to track this. The last payment is mostly principal, and will jump him ahead 6 months and change. But not an exact number, and he will lose his place for tracking purposes. OP seemed to like being able to track his progress right on the amortization schedule. Joe

formatting link

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
joetaxpayer

I got confused on this thread.

Make sure you don't incur a prepayment penalty

I think the lender will recompute your payments, but NOT the length of the mortgage (you would have to refinance into a shorter-term mortgage for that)

While marginally lower payments will improve your cash flow a little, as John pointed out if you can invest the prepayment at a higher rate of return than your interest cost on the mortgage (both after taxes), you end up better off in objective financial terms.

Your preferences and perceptions all play into your decisions. Most take out a mortgage because they cannot afford to pay cash. But someone who could afford to pay cask may elect a mortgage loan to invest the amount in a higher return vehicle (such as stocks, historically), or to leverage his returns on real estate held for investment purposes (e.g. interest-only loans).

Many feel more secure and comfortable when all they pay on their house is taxes and insurance, utilities and maintenance or improvements. If that is your preference, why not ask the mortgage company (you should definitely ask them before you write a check what will happpen) about refinancing into a shorter-term mortgage at the same time?

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
dapperdobbs

Of course it would depend on the particular loan documents, but my experience has been that prepaying reduces the term of the mortgage, not the monthly payment. So I think you are wrong here.

Dave

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
Dave Dodson

This is a good point not to be overlooked. The rate difference from a

30yr fixed to a 15yr fixed is .5% or better. With OP's mortgage about 6.7% from what I recall, a refinance may be in order. In any case, when one is on a prepayment track it makes sense to monitor where they stand in terms of principal, rate, and time remaining, as there's often a tipping point, where you might jump from having 18 years remaining (on the 30yr mort) to a new 15 at a lower rate with a payment no higher than before the refi. Just something to ponder. Joe

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
joetaxpayer

I think you are right, Dave. A fixed rate mortgage will not see the payment required adjust due to prepayments. On the other hand, I found that variables do work that way. When adjustment time came, the new balance, time remaining, and new rate were used to calculate the payment, so prepayments effectively reduced the payment at the next reset.

Joe

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
joetaxpayer

Joe and Dave - Thanks for the clarification that a prepayment will change the term of the mortgage and not the size of the payments (still the OP should check, with all the different paper floating around). And the point Joe that you brought up about the 18 years or thereabouts and 15 years might well work out. If I read the table correctly, I noticed the principal seems to be close to 110k plus - maybe that's where part of my confusion is - is this a new 110k loan on a 135K something property (with fees to be paid off along with the mortgage), or did he buy it 10 years ago for 200k (now worth 400k)??? A week ago I think I saw a 20 year mortgage, as well. Things have changed - I'd never heard of a 30% down payment.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
dapperdobbs

For the vast majority of fixed-rate mortgages, the monthly payment is fixed. Prepayments of principal, therefore, do *not* lower your next payment ("recompute your payments"). But since there is less principal remaining on the loan, it *does* shorten the remaining life of the loan.

Some mortgages (mine, in fact) may offer a "recompute" option whereby (again, in my case, with a fee) to recompute the monthly payment. If one has, in fact, prepaid a bunch of principal, such a recomputation would stretch the life of the loan back out to the original term (rather than the shortened life the prepayments caused) and thereby lowere the monthly minimum payments. But that recomputation is by no means the default action in the event of unscheduled principal prepayments.

Reply to
BreadWithSpam

I've always done exactly this with my mortgages. Some might say, why not just get a bi-weekly mortgage and make the scheduled payments?

However, the beauty of including the next principal amount in your current payment is its flexibility. In other words, include next month's principal whenever your finances allow. If you can't swing the extra principle payment in a given month, just make the required payment.

Of course, as many have pointed out already, this is much easier to do early in the loan, as the monthly principal portion grows with time.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
BRH

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.