Go Back  DVD Talk Forum > General Discussions > Other Talk
Reload this Page >

YAFWPT: Extra principal payment on mortgage

Other Talk "Otterville"

YAFWPT: Extra principal payment on mortgage

Old 04-04-12, 01:27 PM
  #1  
DVD Talk Hero
Thread Starter
 
Th0r S1mpson's Avatar
 
Join Date: Apr 1999
Location: Seattle, WA
Posts: 36,438
Likes: 0
Received 1 Like on 1 Post
YAFWPT: Extra principal payment on mortgage

For a standard 30 year fixed mortgage, I believe that making an extra payment against the principal will not reduce your monthly payments, but it will reduce the life of the loan. Correct? I know this depends on the loan type.

So that may seem somewhat pointless if you plan to exit the mortgage prior to completing the term.

But will it increase the amount of your subsequent payments that goes towards the principal and reduce the interest on your monthly payments, resulting in a net gain if you eventually sell the home, even though your monthly payment remains the same?

Trying to figure out if there is any benefit to making payments on a higher interest mortgage (say 5%) that you plan on leaving early, rather than the measly 1% interest you make on other investments currently.
Old 04-04-12, 01:47 PM
  #2  
DVD Talk Legend
 
Ky-Fi's Avatar
 
Join Date: Dec 2000
Location: Cape Ann, Massachusetts
Posts: 10,928
Likes: 0
Received 1 Like on 1 Post
Re: YAFWPT: Extra principal payment on mortgage

Yes, making an extra payment to principal will reduce the life of the loan, but not the monthly payments, on a fixed rate loan. Although, sometimes if you make a large enough principal payment, the bank will offer to recast the payments for you, whereby the term of the loan stays the same but your payments go down.


Basically, every month, the breakdown of the mortgage payment you're paying is calculated by taking the principal balance, times interest rate, divided by 12---that's the interest due, and the rest goes to principal. If you're able to pay $500 extra towards the principal, then that's $500 you're no longer paying interest on for however long you have the loan. And the next month, more of your mortgage payment would go to principal , and less to interest, and so on, and eventually your loan pays off earlier than it was scheduled to. This is usually to your advantage, unless the $500 is now somewhere where it's earning more than the interest rate of your mortgage.
Old 04-04-12, 01:48 PM
  #3  
DVD Talk Legend
 
Shazam's Avatar
 
Join Date: Jul 1999
Location: Canuckistan
Posts: 10,027
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Thor Simpson View Post
For a standard 30 year fixed mortgage, I believe that making an extra payment against the principal will not reduce your monthly payments, but it will reduce the life of the loan. Correct? I know this depends on the loan type.
Yes.

So that may seem somewhat pointless if you plan to exit the mortgage prior to completing the term.
Why is it pointless? You gain equity.

But will it increase the amount of your subsequent payments that goes towards the principal and reduce the interest on your monthly payments, resulting in a net gain if you eventually sell the home, even though your monthly payment remains the same?
Yes.

Trying to figure out if there is any benefit to making payments on a higher interest mortgage (say 5%) that you plan on leaving early, rather than the measly 1% interest you make on other investments currently.
You will save on the interest that your payment will accrue over the life of the mortgage term.
Old 04-04-12, 01:50 PM
  #4  
DVD Talk Legend
 
Nick Danger's Avatar
 
Join Date: Mar 2001
Location: Albuquerque
Posts: 24,505
Received 168 Likes on 121 Posts
Re: YAFWPT: Extra principal payment on mortgage

I called my mortgage holder yesterday because I'm asking similar questions. If I put a lump of money into the mortgage principal, my monthly payments stay the same, but the mortgage ends sooner. I have six years left on the mortgage, and if I sent in 1/3 of the amount I owe, I would finish with the mortgage in four years.

I plan on staying in this house. I would like to not have a monthly mortgage payment.

In your case, if you paid off part of the mortgage, I guess that you would get that money back out when you sold the house. In the mean time it would not be liquid. You could sell stocks, or even cash out a CD (with penalty). But you would not be able to get the money back from the mortgage until you sell.
Old 04-04-12, 02:06 PM
  #5  
DVD Talk Limited Edition
 
Join Date: May 2000
Location: Saint Louis
Posts: 5,829
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Thor Simpson View Post

But will it increase the amount of your subsequent payments that goes towards the principal and reduce the interest on your monthly payments, resulting in a net gain if you eventually sell the home, even though your monthly payment remains the same?

Trying to figure out if there is any benefit to making payments on a higher interest mortgage (say 5%) that you plan on leaving early, rather than the measly 1% interest you make on other investments currently.
Yes, you'd be making essentially your interest rate on the amount you prepay. Your overall % that goes to the principal will increase and the amount that goes to interest will decrease.

Conventional wisdom was that you shouldn't prepay your mortgage because you could make 10% a year in the stock market. However, that's not been the case for many people who are now prepaying their mortgage to get a no risk 4%, 5% guaranteed return on their money.

I prepay mine by quite a bit. We have a 30 year mortgage but pay it like a 15 year.
Old 04-05-12, 01:08 AM
  #6  
DVD Talk Ultimate Edition
 
Shoveler's Avatar
 
Join Date: Mar 2000
Location: Cedar Rapids, IA, USA
Posts: 4,723
Likes: 0
Received 1 Like on 1 Post
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Thor Simpson View Post
Trying to figure out if there is any benefit to making payments on a higher interest mortgage (say 5%) that you plan on leaving early, rather than the measly 1% interest you make on other investments currently.
Originally Posted by suziq999 View Post
Yes, you'd be making essentially your interest rate on the amount you prepay. ... many people [are] now prepaying their mortgage to get a no risk 4%, 5% guaranteed return on their money.
Another factor to consider is that you are losing the tax benefits, assuming you itemize (as most home owners do). If you are paying 5% interest on your mortgage, and are in the 20% tax bracket, you are recouping 1% of the 5% interest, so you're only ending up paying 4% interest when all is said and done. The higher your tax bracket, the less beneficial it is to prepay your mortgage.

If you are not already maxing your 401k and Roth IRA contributions, you should do some serious number crunching and consider putting the extra funds into those pots, letting the mortgage run its normal course.
Old 04-05-12, 01:24 AM
  #7  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,189
Likes: 0
Received 2 Likes on 2 Posts
Re: YAFWPT: Extra principal payment on mortgage

You take the 30 year to give you flexibility, and try to pay on it like a 10 or 15. That's always been my rule. Payment stays the same, but you can always cut back if you are then use to paying a fair amount more.
Old 04-05-12, 01:26 AM
  #8  
DVD Talk Legend
 
Heat's Avatar
 
Join Date: Dec 2000
Location: Central Illinois
Posts: 16,699
Likes: 0
Received 1 Like on 1 Post
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Thor Simpson View Post
... rather than the measly 1% interest you make on other investments currently.
What are you investing in? My mutual funds have returns of around 15% over the past three months (YTD).

Anyway, adding extra payment is an easy way to "save" money - you are really building the equity in your house which is a good thing but is not easily liquid. Do you have liquid savings for an emergency? If not, consider putting money into a good, no-load mutual fund and designate it as a Roth IRA. Contributions can be withdrawn at any time without penalty and any gains would be left for eventual use in retirement - tax free since you put in post-tax money.
Old 04-05-12, 02:47 AM
  #9  
DVD Talk Limited Edition
 
Join Date: Feb 2001
Location: So Cal
Posts: 7,071
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Shoveler View Post
Another factor to consider is that you are losing the tax benefits, assuming you itemize (as most home owners do). If you are paying 5% interest on your mortgage, and are in the 20% tax bracket, you are recouping 1% of the 5% interest, so you're only ending up paying 4% interest when all is said and done. The higher your tax bracket, the less beneficial it is to prepay your mortgage.
Wrong, wrong, wrong, and wrong.

If you are not already maxing your 401k and Roth IRA contributions, you should do some serious number crunching and consider putting the extra funds into those pots, letting the mortgage run its normal course.
He doesn't want more tax benefits, he wants to minimize his interest payments and maximize his home equity.
Old 04-05-12, 09:41 AM
  #10  
DVD Talk Ultimate Edition
 
Shoveler's Avatar
 
Join Date: Mar 2000
Location: Cedar Rapids, IA, USA
Posts: 4,723
Likes: 0
Received 1 Like on 1 Post
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Superboy View Post
Wrong, wrong, wrong, and wrong.
Ummmm, how is it wrong to suggest that he consider the tax implications? How is home equity any more beneficial than Roth IRA principal? The OP stated that he was "trying to figure out if there was any benefit", not that he was committed to minimizing his interest payments. I'm merely suggesting an alternate option for maximizing the benefit of those extra dollars.

If he is willing to accept the risk of putting the money into a Roth IRA fund (in which the risk can be minimized by selecting a fairly conservative fund), then he has the potential to gain more of an advantage in the long run by putting the money into a Roth. Again, I'm not saying this is what he should do, just suggesting that it is an option to be considered.

Like I said originally, it is a simple matter of numbers. You cannot deny that he will lose a tax benefit when he reduces the interest he is paying. I'm not saying he should want to pay more interest, but you have to look at the effective interest rate he is paying, which may not be 5%, it may be more like 3.75%. Then compare that to what he can gain elsewhere if he invests the money rather than prepaying the mortgage. It is ignorant to suggest that his only viable option is to prepay the mortgage.
Old 04-06-12, 01:19 AM
  #11  
DVD Talk Limited Edition
 
Join Date: Feb 2001
Location: So Cal
Posts: 7,071
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

I was going to post a long rant about why you're wrong, but then again, it's my job to tell people that.
Old 04-06-12, 10:38 AM
  #12  
DVD Talk Ultimate Edition
 
Shoveler's Avatar
 
Join Date: Mar 2000
Location: Cedar Rapids, IA, USA
Posts: 4,723
Likes: 0
Received 1 Like on 1 Post
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Superboy View Post
I was going to post a long rant about why you're wrong, but then again, it's my job to tell people that.
No sarcasm intended here, if I am wrong, I would truly like to know where and when I am wrong, please explain (if it is possible to do so without the rant ). I've been wrong before, will be wrong again, I just don't see how I could be wrong, in this instance, with the suggestion of one possible option. Do you not agree with my assertion that it is possible, with some degree of risk, to take the extra cash and gain more money than will be saved by prepaying the mortgage? Even if you eliminate the concept of tax benefits (I could go on a long rant about why you should not eliminate that from this equation, but... ), if the interest rate on the mortgage is X%, then any investment making > X% is a gain. I mentioned both Roth IRAs and 401ks, but then focused on the Roth because it would allow him to withdaw up to the original investment amount at any time with no penalties. Which would actually give more flexibility than prepaying the mortgage, those funds would not be seen again until he either sold the house, or completed the (shortened) term of the loan.

Please, feel free to explain, don't fall back on the old "You're wrong, I just don't have time to explain why." I'm not saying this is what he should do, just suggesting that he consider it as an option.
Old 04-06-12, 11:03 AM
  #13  
DVD Talk Legend
 
Shazam's Avatar
 
Join Date: Jul 1999
Location: Canuckistan
Posts: 10,027
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by kvrdave View Post
You take the 30 year to give you flexibility, and try to pay on it like a 10 or 15. That's always been my rule. Payment stays the same, but you can always cut back if you are then use to paying a fair amount more.
In the US, are you allowed to change your amortization length when you renew your mortgage? I do this all the time, so I always re-up at 25 years and then jack up the payment, but I'm in snow-land.
Old 04-06-12, 11:33 AM
  #14  
DVD Talk Legend
 
Join Date: Feb 2000
Posts: 13,040
Likes: 0
Received 9 Likes on 7 Posts
Re: YAFWPT: Extra principal payment on mortgage

"Renew your mortgage"? Not familiar with that term?
Old 04-06-12, 11:39 AM
  #15  
DVD Talk Legend
 
Shazam's Avatar
 
Join Date: Jul 1999
Location: Canuckistan
Posts: 10,027
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Uh, you know, when your mortgage term expires and you need to get another one? As opposed to the amortization...

Or do people get 25-year mortgages to go with their 25 year amortizations?
Old 04-06-12, 12:58 PM
  #16  
DVD Talk God
 
kvrdave's Avatar
 
Join Date: Aug 1999
Location: Pacific NW
Posts: 86,189
Likes: 0
Received 2 Likes on 2 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Shazam View Post
In the US, are you allowed to change your amortization length when you renew your mortgage? I do this all the time, so I always re-up at 25 years and then jack up the payment, but I'm in snow-land.
Our length of term and amoritizations generally are the same length. So you get a 30 year mortgage and it pays off in 30. You can get 5 year balloons, etc. where you need to get a new mortgage after 5 years, as it is amortized on a longer length. Those have screwed many people and the savings in interest rate rarely makes it worth getting, in my view, though many disagree.

Most loans are 15 year and 30 year for residential mortgages. You don't see 25 year loans very often. I remember when they tried 50 year loans for a short time, but the payment difference was almost nothing. You do see those in large commercial loans on occasion.
Old 04-06-12, 02:11 PM
  #17  
DVD Talk Legend
 
Shazam's Avatar
 
Join Date: Jul 1999
Location: Canuckistan
Posts: 10,027
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Wow. That's... no wonder your banks are so screwed up.

I'm on a four year term right now, 2.99%. I was on a five year term at 4.37%, but during the last six months of the mortgage most agreements allow you to look around for a new term before the last one expires. I re-amortized at 17 years because I wanted to drastically increase my payment, so I should be done in 10.5 years now.

Of course, Canada's never had ARMs, and the Canadian gov't banned 35 year amortizations a few years ago.

But we'll probably have a bubble too
Old 04-06-12, 02:15 PM
  #18  
DVD Talk Legend
 
Join Date: Feb 2000
Posts: 13,040
Likes: 0
Received 9 Likes on 7 Posts
Re: YAFWPT: Extra principal payment on mortgage

So what happens if you can't get a new loan at the end of that 5 year term?
Old 04-06-12, 02:18 PM
  #19  
DVD Talk Legend
 
Shazam's Avatar
 
Join Date: Jul 1999
Location: Canuckistan
Posts: 10,027
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Timber View Post
So what happens if you can't get a new loan at the end of that 5 year term?
Your current bank will almost always re-up you automatically at some heinous interest rate.

If you've actually been contentious about paying, then it's usually a no-brainer getting another loan.

There's also ten-year terms, but nothing longer that's common. Of course commercial loans work much more like they do in the US.
Old 04-07-12, 06:52 AM
  #20  
DVD Talk Limited Edition
 
Join Date: Feb 2001
Location: So Cal
Posts: 7,071
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Shoveler View Post
No sarcasm intended here, if I am wrong, I would truly like to know where and when I am wrong, please explain (if it is possible to do so without the rant ). I've been wrong before, will be wrong again, I just don't see how I could be wrong, in this instance, with the suggestion of one possible option. Do you not agree with my assertion that it is possible, with some degree of risk, to take the extra cash and gain more money than will be saved by prepaying the mortgage? Even if you eliminate the concept of tax benefits (I could go on a long rant about why you should not eliminate that from this equation, but... ), if the interest rate on the mortgage is X%, then any investment making > X% is a gain. I mentioned both Roth IRAs and 401ks, but then focused on the Roth because it would allow him to withdaw up to the original investment amount at any time with no penalties. Which would actually give more flexibility than prepaying the mortgage, those funds would not be seen again until he either sold the house, or completed the (shortened) term of the loan.

Please, feel free to explain, don't fall back on the old "You're wrong, I just don't have time to explain why." I'm not saying this is what he should do, just suggesting that he consider it as an option.
No it's not even a good option.

I know you're not saying that he should spend more money to save in taxes, but in the long run (which is more important in considerations like this) he saves money because he's spending less on interest period.
Old 04-07-12, 09:44 AM
  #21  
DVD Talk Hall of Fame
 
Duran's Avatar
 
Join Date: Jul 1999
Location: Columbia, MD
Posts: 8,173
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Superboy View Post
No it's not even a good option.

I know you're not saying that he should spend more money to save in taxes, but in the long run (which is more important in considerations like this) he saves money because he's spending less on interest period.
You're not making any sense. He's saying that when you compare what you're spending in interest on your house (compared to other debt), you should subtract any tax benefit from the interest rate. That tax benefit is higher if you are in a higher tax bracket. You could argue whether that is true in cases where someone mortgage interest is really the only thing a person is itemizing (you should only count the difference between the standard deduction and the itemized), but the basis of Shoveler's point is correct, as far as I know.

So explain what you're talking about, or stop suggesting that Shoveler's advice is incorrect.
Old 04-07-12, 09:48 AM
  #22  
DVD Talk Hero
 
Join Date: May 2001
Posts: 40,461
Received 137 Likes on 108 Posts
Re: YAFWPT: Extra principal payment on mortgage

1 extra payment a year (all principal) will take upwards of 7 years off your loan, but will otherwise not effect it unless you refinance.
Old 04-07-12, 03:26 PM
  #23  
DVD Talk Ultimate Edition
 
Shoveler's Avatar
 
Join Date: Mar 2000
Location: Cedar Rapids, IA, USA
Posts: 4,723
Likes: 0
Received 1 Like on 1 Post
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Superboy View Post
No it's not even a good option.

I know you're not saying that he should spend more money to save in taxes, but in the long run (which is more important in considerations like this) he saves money because he's spending less on interest period.
In the long run is when my argument makes the most sense, because the risk associated with market fluctuations will be minimized (no guarantee, but based on historical indications, extremely likely, again depending on the type of investments he chooses).

But, even if you want to say that he shouldn't do this because he is risk intolerant (which he doesn't state in the OP), or even if you want to say that he shouldn't do this because he won't be able to get to the funds as easily if he invests them as I'm suggesting (which only applies to any gains if he invests in a Roth IRA), I cannot fathom how you can continue to argue that it isn't a viable option.

Your vision is too focused on saving money by spending less on interest. If you can borrow money at 10% and invest it to make 12%, you are missing out on a 2% gain by "saving" on that 10% interest you would be paying. In this case, he's already borrowed the money. It is foolish to pay it back early if there are more profitable things to do with that money before it is owed. It might be worth it to some people, I know there are those who just like to have their house paid off, but from a financial and logical point of view, it is not sound reasoning.
Old 04-08-12, 08:07 AM
  #24  
DVD Talk Limited Edition
 
Join Date: Feb 2001
Location: So Cal
Posts: 7,071
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Shoveler View Post
In the long run is when my argument makes the most sense, because the risk associated with market fluctuations will be minimized (no guarantee, but based on historical indications, extremely likely, again depending on the type of investments he chooses).
Just to clarify here, are you saying that the risk associated with market fluctuations will be minimized in the long run? Because it isn't.

But, even if you want to say that he shouldn't do this because he is risk intolerant (which he doesn't state in the OP), or even if you want to say that he shouldn't do this because he won't be able to get to the funds as easily if he invests them as I'm suggesting (which only applies to any gains if he invests in a Roth IRA), I cannot fathom how you can continue to argue that it isn't a viable option.

Your vision is too focused on saving money by spending less on interest. If you can borrow money at 10% and invest it to make 12%, you are missing out on a 2% gain by "saving" on that 10% interest you would be paying. In this case, he's already borrowed the money. It is foolish to pay it back early if there are more profitable things to do with that money before it is owed. It might be worth it to some people, I know there are those who just like to have their house paid off, but from a financial and logical point of view, it is not sound reasoning.
You do realize that not everyone can take the mortgage interest deduction? and for those that do, they can easily lose the tax benefit for a myriad of reasons.

And you're also arguing that paying off an outstanding loan is not as financially sound as investing with a greater rate of return than the interest rate on a loan. That's poor financial planning right there. Here's why:

Your investment is not a guarantee. For anything that exceeds even the cheapest mortgage rates, part of the return is based on the risk premium. However, his mortgage is still going to be there even if his investments go sour.
Old 04-08-12, 08:10 AM
  #25  
DVD Talk Limited Edition
 
Join Date: Feb 2001
Location: So Cal
Posts: 7,071
Likes: 0
Received 0 Likes on 0 Posts
Re: YAFWPT: Extra principal payment on mortgage

Originally Posted by Duran View Post
You're not making any sense. He's saying that when you compare what you're spending in interest on your house (compared to other debt), you should subtract any tax benefit from the interest rate. That tax benefit is higher if you are in a higher tax bracket. You could argue whether that is true in cases where someone mortgage interest is really the only thing a person is itemizing (you should only count the difference between the standard deduction and the itemized), but the basis of Shoveler's point is correct, as far as I know.

So explain what you're talking about, or stop suggesting that Shoveler's advice is incorrect.
No it's not.

Thread Tools
Search this Thread

Archive - Advertising - Cookie Policy - Privacy Statement - Terms of Service - Do Not Sell My Personal Information -

Copyright 2018 MH Sub I, LLC dba Internet Brands. All rights reserved. Use of this site indicates your consent to the Terms of Use.