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Is the idea of extra payments to your mortgage a placebo? Please educate me

HuumanCreed

Well-Known Member
SH Member
Joined
Aug 21, 2020
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Location
Westminster Maryland
We just made a final payment to an auto loan. With the extra freed money each month, wife want to put it in extra mortgage payment so we can payoff the mortgage faster. I was thinking of putting it in college saving for the kids or investments.

Because unless I'm missing something, in a typical mortgage you are paying off the interest first, then the principle. That the bank make most of the profit from the first 10-15 years of a 30 years mortgage.

Example: let say your mortgage is $1200 a month, but you paid an extra $100 a month so at the end of the year, you pay an extra $1200 to the principle balance. That would only cut your 30 years load to 29 years and 10 months. Because that extra payment went to the BACKEND principle. Because right now, that $1200 you pay is mostly $900 interest and $300 principle. That it at the 15 years mark is when you are paying 50/50 to interest and principle.

So anyway, since we owned our house for 5 years already, I dont see the benefit of small payment to our principle. I see the money better used elsewhere. Especially since the $1200 payment today would be valued at $1000 in 20 years due to inflations.

Its not such a big decision that I would contact a financial adviser. Just wondering if you folks have any experiences in this topic. Thank you.
 
Not sure were you are getting your numbers but there are mortgage calculators online that have amortization schedules and allow you to add extra payments to see the difference they make.

According to this calculator a $100 extra monthly payment on a loan similar to your example would pay off a 30 yr loan almost five years early and save $38k in interest. IMG_2722.jpeg
 
The extra money on the mortgage going to principal will lower your principle and thereby decrease the total amount that you pay in interest for the life of the loan and decrease the time it takes you to pay off the loan. The loan amortization calculator will show you how much interest you can save and how much you will contribute. You would need to look at the amount extra you’re able to pay down over a duration and compare that to investing that same amount of money over that time period and see which makes the bigger difference. The money you invest in traditional retirement accounts will continue to grow even after you pay off your house and could potentially make you more money in the long run. I would check out loan amortization schedules and run a couple different scenarios to see what works best for you. You can do the same with average S&P500 for example returns for the last 50 or 75 years, 8% would probably be conservative enough. Use investment calculator to do what that money could grown to be in the same amount of time, then see what it could be if you left it and let it grow.

Loan Amortization + additional payment

Investment Calculator
 
Most mortgages will allow you to pay down the principal with extra payments. So, if you made 12 payments of $100, that $1200 would be ALL principal. Taking off that extra $100 dollars every month actually decreases the interest you are paying. This makes it not just one extra payment a year but taking off extra interest in the beginning allowing for even more principal to get paid.

We have paid extra for the whole mortgage. We refinanced after 6 years, and went from a 30 year to a 20 year mortgage and slightly lowered our payment (interest was better) thus saving 4 years of payments. I think we have less than 7 years left to pay. Likely a total of 24 years instead of 30 paying an extra payment.
 
Not sure were you are getting your numbers but there are mortgage calculators online that have amortization schedules and allow you to add extra payments to see the difference they make.

According to this calculator a $100 extra monthly payment on a loan similar to your example would pay off a 30 yr loan almost five years early and save $38k in interest. View attachment 91844
4529EB70-0B1A-4656-B45C-D40D5ED39A98.jpeg
at a very high level, GCs picture and this one shows you two option for your money over the same amount of time of paying down loan or investing in traditional 401k/RothIRA etc.
 
Yes, pay down your principle by adding extra to your monthly payment….. as the previous posts mentioned. However, I would suggest if you have other debts at a higher interest rate…… like a credit card…. to pay that off first and foremost. Then add the extra $ to your mortgage.
 
Not sure were you are getting your numbers but there are mortgage calculators online that have amortization schedules and allow you to add extra payments to see the difference they make.

According to this calculator a $100 extra monthly payment on a loan similar to your example would pay off a 30 yr loan almost five years early and save $38k in interest. View attachment 91844
Ok, I guess the answer is not a simple one and it all depends on the ratio of the extra payment in compared to the whole load amount. I used the calculator you suggested and while the number does make sense when I plugged in the number of the example. It paint a whole different picture for my scenario! Man I cant believe I'm shocked at the currently interest rates when I been told that 30 years ago it was normal for rates to be in the mid teens....
 
The extra money on the mortgage going to principal will lower your principle and thereby decrease the total amount that you pay in interest for the life of the loan and decrease the time it takes you to pay off the loan. The loan amortization calculator will show you how much interest you can save and how much you will contribute. You would need to look at the amount extra you’re able to pay down over a duration and compare that to investing that same amount of money over that time period and see which makes the bigger difference. The money you invest in traditional retirement accounts will continue to grow even after you pay off your house and could potentially make you more money in the long run. I would check out loan amortization schedules and run a couple different scenarios to see what works best for you. You can do the same with average S&P500 for example returns for the last 50 or 75 years, 8% would probably be conservative enough. Use investment calculator to do what that money could grown to be in the same amount of time, then see what it could be if you left it and let it grow.

Loan Amortization + additional payment

Investment Calculator
This is decent advice but overall, since it’s inception, ror on most investments are around 7%. Once you pay down your debts then accelerate your IRA contributions.
 
We just made a final payment to an auto loan. With the extra freed money each month, wife want to put it in extra mortgage payment so we can payoff the mortgage faster. I was thinking of putting it in college saving for the kids or investments.

Because unless I'm missing something, in a typical mortgage you are paying off the interest first, then the principle. That the bank make most of the profit from the first 10-15 years of a 30 years mortgage.

Example: let say your mortgage is $1200 a month, but you paid an extra $100 a month so at the end of the year, you pay an extra $1200 to the principle balance. That would only cut your 30 years load to 29 years and 10 months. Because that extra payment went to the BACKEND principle. Because right now, that $1200 you pay is mostly $900 interest and $300 principle. That it at the 15 years mark is when you are paying 50/50 to interest and principle.

So anyway, since we owned our house for 5 years already, I dont see the benefit of small payment to our principle. I see the money better used elsewhere. Especially since the $1200 payment today would be valued at $1000 in 20 years due to inflations.

Its not such a big decision that I would contact a financial adviser. Just wondering if you folks have any experiences in this topic. Thank you.

What’s the interest rate on your mortgage?

What percentage of your pretax income are your home expenses (mortgage interest taxes)?


How reliable is your income? Both in terms of amount, and that you will continue to be able to earn it?
 
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You are missing the fact that you are no longer paying interest on $1200 for the next 29 years in the original post. Adds up quick! Same for the following year etc.
 
In a similar boat over here, looks to me like it's better to just invest the money long term. https://www.forbes.com/advisor/mortgages/pay-off-mortgage-early-vs-investing/
This is the conventional thinking. That I ignored.

There is an unaccounted-for benefit in owing less to the bank, and/or being in position to eliminate them from your life ASAP.

As the mortgage got sold around from company to company, each was a little different in some strange way. Did not care for that. After some years, I was able to calculate what portion of the next payment was for interest, and what portion for principle. Added the exact amount to knock $1000 off principle every month. The 30 year mortgage got paid off in 14 years.

Today, funds that would go for mortgage get auto-deposited into investment accounts.

No vehicle payment either, same approach.

Sudden unemployment is always a possibility, but concerns me less knowing I'm no longer in debt.
 
This is the conventional thinking. That I ignored.

There is an unaccounted-for benefit in owing less to the bank, and/or being in position to eliminate them from your life ASAP.

As the mortgage got sold around from company to company, each was a little different in some strange way. Did not care for that. After some years, I was able to calculate what portion of the next payment was for interest, and what portion for principle. Added the exact amount to knock $1000 off principle every month. The 30 year mortgage got paid off in 14 years.

Today, funds that would go for mortgage get auto-deposited into investment accounts.

No vehicle payment either, same approach.

Sudden unemployment is always a possibility, but concerns me less knowing I'm no longer in debt.
My wife and I did the same. Paid off a 20 year mortgage in 3y 10mos. Saved a TON in interest.

My personal opinion, and this stems from a giant rash of layoffs in the 90s, is pay off your mortgage as soon as you can. If the job goes away, your house belongs to you, not the bank. The real estate in and of itself is an investment as well. Once the mortgage is gone, then invest all of that.
 
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Anything extra on mine I pay I can select if it goes to principle, interest or escrow. I’ve been blessed that this is only my 2nd mortgage and 6th house. Sold my last 2 rentals during the height of inflation for a good profit and took this mortgage out just to keep credit but it’ll be paid off in 3 years, 1 year down already. I always say if you can’t pay a house off in 15 years or less it’s too much. I do that with all loans I have to get, get them for max time so that the monthly is lowest and pay them off in half the time, bc we don’t know what life will throw at us it’s good to have a low monthly and pay extra when and while you can.
 
This is the conventional thinking. That I ignored.

There is an unaccounted-for benefit in owing less to the bank, and/or being in position to eliminate them from your life ASAP.

As the mortgage got sold around from company to company, each was a little different in some strange way. Did not care for that. After some years, I was able to calculate what portion of the next payment was for interest, and what portion for principle. Added the exact amount to knock $1000 off principle every month. The 30 year mortgage got paid off in 14 years.

Today, funds that would go for mortgage get auto-deposited into investment accounts.

No vehicle payment either, same approach.

Sudden unemployment is always a possibility, but concerns me less knowing I'm no longer in debt.
Not a financial advisor, and agree to some extent, but unless the unaccounted for benefits are emotional (no argument/opinion there) It all really depends on how your money is invested, though. If it's accessible, you can always choose to take out a chunk of money and pay off the mortgage, or take out money to cover job loss or totalling a car other sudden concerns, where having equity in a house isn't always as accessible. I use the same logic for annual taxes-i'd rather under-pay and have that money accruing interest im my account and then pay more of my taxes at tax time than over- pay via withholding and give the govt a loan that they earn interest off of instead of me and get a refund.

I think that starting with comparing the calculators @gcr0003 linked is the best place to begin, and each person has to make an individual decision. Me personally, with the mortgage rate I have currently compared to the estimated rate of return on investment, it doesn't make sense to pay down that debt now. Investing will let me pay it off later (in a similar early timeframe assuming I don't need to use some of that money in the short term for an emergency) and still come out well ahead cash wise even though I'm paying "more" interest that duration, while also having the increased liquidity in the short term should something happen like needing to buy a new car or something.

But in reality it's all pretty dang complicated, even if it is just 100 a month, and talking with an accountant is the best way to go. All of this conversation assumes no car payment/credit card debt whatsoever. Pay those off first before anything else IMHO.
 
Sudden unemployment is always a possibility, but concerns me less knowing I'm no longer in debt.

I know a lot of guys that were thankful their homes were paid off when the oilfield tanked here in 2015. Also knew a bunch that lost their homes. Not saying what other people should do but there is value in having a paid off home and the peace a debt free life provides.
 
Having your house paid off is great. I am retired with 0 debt. I learned alot from guys like Dave Ramsey.
He recomends a emergency fund as a top priority. I was in sales for 40 years. After the first two layoffs I quickly understood the value of a emergency fund. My wife and I built it up to enough money to last one year. We still have it.
if you have any high interest debt (credit cards), Dave Ramsey may recomend you pay that off first.
PS: A emergency is not money for a new couch.
 
We just made a final payment to an auto loan. With the extra freed money each month, wife want to put it in extra mortgage payment so we can payoff the mortgage faster. I was thinking of putting it in college saving for the kids or investments.

Because unless I'm missing something, in a typical mortgage you are paying off the interest first, then the principle. That the bank make most of the profit from the first 10-15 years of a 30 years mortgage.

Example: let say your mortgage is $1200 a month, but you paid an extra $100 a month so at the end of the year, you pay an extra $1200 to the principle balance. That would only cut your 30 years load to 29 years and 10 months. Because that extra payment went to the BACKEND principle. Because right now, that $1200 you pay is mostly $900 interest and $300 principle. That it at the 15 years mark is when you are paying 50/50 to interest and principle.

So anyway, since we owned our house for 5 years already, I dont see the benefit of small payment to our principle. I see the money better used elsewhere. Especially since the $1200 payment today would be valued at $1000 in 20 years due to inflations.

Its not such a big decision that I would contact a financial adviser. Just wondering if you folks have any experiences in this topic. Thank you.
Interest is based on current outstanding principle. So you see compounded savings over the course of the loan as you payoff more principle.

One thing to consider is what is your interest rate?

If you can invest the money at a higher ROI that your interest rate you might be better off to do that. A lot of savings accounts and CDs are at the 4.5-6% interest rate. So people who got mortgages during the Covid rate drop, 2.5 - 3.5% range should consider investing money instead of paying more on their mortgage. This is typical monetary policy for times of inflation.
 
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