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DIFFERENT mortgage payoff question
Old 01-10-2017, 11:08 AM   #1
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DIFFERENT mortgage payoff question

This is NOT a another question about whether to pay off a mortgage early.

This question is GIVEN a person is going to payoff a mortgage early…

From a finance standpoint (not psychology, etc) is there any difference between these two scenarios? In the first scenario, a person pays $500 extra per month for ten years and pays off their mortage in half the time. In the second scenario, the person stuffs $500 per month in a coffee can and after ten years makes a $60k payment to the lender.

The amortization schedule is fixed, correct? Feels like I'm missing something.
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Old 01-10-2017, 11:12 AM   #2
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The difference is that by making extra payments on the principal one will pay less interest on the loan. The amortization schedule is not fixed, in the sense that by making the extra principal payments there will be less principal outstanding on the loan, therefore less total interest will be paid over the life of the loan.
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DIFFERENT mortgage payoff question
Old 01-10-2017, 11:14 AM   #3
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DIFFERENT mortgage payoff question

No it's not fixed in that sense. Each extra dollar applied to principal reduces all future interest due on that dollar. Some mortgage companies handle principal pAyments a bit differently so it would be worth a call to the mortgage company for details.

There are TONS of calculators around that will compare pay down with extra principal payments. I use dinkytown.net.
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Old 01-10-2017, 11:40 AM   #4
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Thanks to both of you. No doubt that both scenarios (1) and (2) in my original question will save interest over the life of the loan. I couldn't find a calculator that would let me compare the two.

Common sense tells me what walt34 said is correct, but I'm struggling with the mechanics. I'm paying a fixed amount every month, and my ORIGINAL amortization schedule told me how much of that was principle and how much interest. Does my ACTUAL amortization schedule change every month that I overpay my principle? And if so, does the lender apply the few dollars of interest overpay against my outstanding principle? I'm not convinced!
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Old 01-10-2017, 11:46 AM   #5
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Try this one

Extra Payment Mortgage Calculator: Making Additional Home Loan Payments
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Old 01-10-2017, 11:48 AM   #6
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If you pay extra money towards principal, it's not "interest overpay". It's extra money that is paid to principal. And yes, whenever you pay extra money towards principal, the amortization of the loan changes and the new interest amount due is recalculated based on your new remaining principal balance. However, be sure to alert your lender to your wish to apply the money as extra principal so they know what your intentions are.
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Old 01-10-2017, 11:49 AM   #7
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Quote:
Originally Posted by Louis2 View Post
Thanks to both of you. No doubt that both scenarios (1) and (2) in my original question will save interest over the life of the loan. I couldn't find a calculator that would let me compare the two.

Common sense tells me what walt34 said is correct, but I'm struggling with the mechanics. I'm paying a fixed amount every month, and my ORIGINAL amortization schedule told me how much of that was principle and how much interest. Does my ACTUAL amortization schedule change every month that I overpay my principle? And if so, does the lender apply the few dollars of interest overpay against my outstanding principle? I'm not convinced!


Most reputable mortgage companies will pay any extra against the principal, reducing the amount of interest in each subsequent month. A phone call should confirm that for yours.
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Old 01-10-2017, 11:53 AM   #8
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Does my ACTUAL amortization schedule change every month that I overpay my principle? And if so, does the lender apply the few dollars of interest overpay against my outstanding principle?
Yes, they will recalculate the interest charge every time you make an extra principal payment. You only pay interest on the actual loan balance, not what the normal amortization schedule calls for.

There is no overpay of interest (may depend on your loan contract) because normally the mortgage payment is in arrears. That is, your payment due say, February 1 is based on the principal balance in January. So if you make an extra payment February 1 you won't see the change until March - then you should see that the interest charge in Feb was less than the amortization schedule called for.
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Old 01-10-2017, 11:55 AM   #9
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Quote:
Originally Posted by Louis2 View Post
.....Common sense tells me what walt34 said is correct, but I'm struggling with the mechanics. I'm paying a fixed amount every month, and my ORIGINAL amortization schedule told me how much of that was principle and how much interest. Does my ACTUAL amortization schedule change every month that I overpay my principle? And if so, does the lender apply the few dollars of interest overpay against my outstanding principle? I'm not convinced!
Yes. Each month the lender will take out for interest your prior principal balance times the contractual annual interest rate divided by 12 (roughly... the exact calculation may vary slightly... contact them for details as to how they would do the calculation). Any excess of your payment over the interest due would be applied to principal.

So over time those extra payments will reduce the interest that you pay and since more $$ is applied to principal you mortgage will be paid off sooner.
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Old 01-10-2017, 11:55 AM   #10
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Thanks to all! Because I'm stubborn, I manually compared my original amort schedule to what I actually paid this year. Of course you all turned out to be correct!
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Old 01-10-2017, 11:56 AM   #11
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Originally Posted by Louis2 View Post
Thanks to both of you. No doubt that both scenarios (1) and (2) in my original question will save interest over the life of the loan. I couldn't find a calculator that would let me compare the two.

Common sense tells me what walt34 said is correct, but I'm struggling with the mechanics. I'm paying a fixed amount every month, and my ORIGINAL amortization schedule told me how much of that was principle and how much interest. Does my ACTUAL amortization schedule change every month that I overpay my principle? And if so, does the lender apply the few dollars of interest overpay against my outstanding principle? I'm not convinced!
This is a fun mortgage calculator from a Canadian bank. Play with all sorts of prepayment scenarios and watch the mortgage melt away on the graph.

Mortgage Payment Calculator | Scotiabank
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Old 01-10-2017, 12:06 PM   #12
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Thanks to all! Because I'm stubborn, I manually compared my original amort schedule to what I actually paid this year. Of course you all turned out to be correct!
You were seriously expecting something different? Ye of little faith!
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Old 01-10-2017, 12:07 PM   #13
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Just remember you still have to pay the full amount each month. Paying ahead doesn't allow you to skip a payment. And beware of the "offers" to miss a payment for Christmas or some other holiday to "help" you out. They still charge interest on the full amount of the payment and often add a payment to the end of the loan.
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Old 01-10-2017, 12:41 PM   #14
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Thanks to both of you. No doubt that both scenarios (1) and (2) in my original question will save interest over the life of the loan. I couldn't find a calculator that would let me compare the two.
In addition to the web sites mentioned, If you are a Quicken user, the product provides a "what if" loan tool that does this comparison.
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Old 01-10-2017, 01:22 PM   #15
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When I was making additional payments to principal, I always included a short note, written in "3rd grade English," that the extra payment amount (I specified the dollars amount) is to be applied to principal. Yes, the bank did recalculate the principal and [lower] remaining interest.
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Old 01-10-2017, 01:26 PM   #16
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Or you can do a quick worksheet showing the difference.... not a hard one to do...


Edit.... this just answers the question about interest... the second option, even though it costs more, gives you the ability to direct that money somewhere else if life changes... that is worth something...
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Old 01-10-2017, 01:35 PM   #17
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I believe that "fixed amortization schedule" refers to the monthly payment, in that you're required to pay so much per month, in equal payments, until the loan is paid off. So, if you pay extra one month, it will get the loan paid off faster, rather than reduce the amount you have to pay in the following months.
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Old 01-10-2017, 01:51 PM   #18
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This is a fun mortgage calculator from a Canadian bank. Play with all sorts of prepayment scenarios and watch the mortgage melt away on the graph.

Mortgage Payment Calculator | Scotiabank

Thanks Meadbh. I found this calculator particularly nice since it let me "what if" both monthly and lump sum additions to principle.
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Old 01-10-2017, 02:12 PM   #19
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Thanks Meadbh. I found this calculator particularly nice since it let me "what if" both monthly and lump sum additions to principle.
You're welcome. It's my favourite mortgage calculator.

BTW, the money you are paying down is the principal. Your actions are guided by your principles.
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Old 01-10-2017, 02:32 PM   #20
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You're welcome. It's my favourite mortgage calculator.

BTW, the money you are paying down is the principal. Your actions are guided by your principles.
Darn it! I could make some joke about needing to increase my principles, but instead I'll just say "oops".
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