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Will I really shave off 8yrs of my mortgage by sending an extra payment
Old 10-07-2011, 09:30 PM   #1
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Will I really shave off 8yrs of my mortgage by sending an extra payment

Will i really shave off 8yrs of my mortgage by sending in an extra payment? If so, is it better to send in one big payment on the principal at the end of the year or a little bit each month?
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Old 10-07-2011, 09:45 PM   #2
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I don't know the math in your case but remember this. The extra payment you send in is all principal. No taxes, no interest, no ins.. That's why it makes such a big diff in the years you'll pay.
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Old 10-07-2011, 09:54 PM   #3
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If you use this calculator and plug in a monthly prepayment equal to 1/12 of your monthly payment, for a 4% 30 yr. mortgage, you will shave 4 years and 1 month off your term. You can also change the prepayment to yearly (make the yearly amount equal to one monthly payment) and see that it is better to make smaller prepayments monthly.

Mortgage Calculator - Bloomberg
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Old 10-07-2011, 10:00 PM   #4
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it is better to make smaller prepayments monthly.

Mortgage Calculator - Bloomberg
Also consider that the money you are holding until the end of the year is probably earning next to nothing while you wait.
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Old 10-07-2011, 11:27 PM   #5
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Definitely, it shortens the life of the mortgage. We've just started putting $325/month in extra, and the mortgage will be paid off 9 years early, which is coincidentally when I want to retire (2031). However, we'll probably move or pay it off before then
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Old 10-07-2011, 11:34 PM   #6
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Of course the other question would be whether you'd end up with more money by paying off your mortgage early, or by maxing out all your retirement savings first.
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Old 10-07-2011, 11:44 PM   #7
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I paid an extra $200 a month on my 15 year mortgage and paid it off in 9.5 years.

Even if it's a 'better' to grow your retirement savings, think if it as diversification. Having a zero on the mortgage is a BIG deal psychologically. Knowing that one piece of your retirement plan is now completed, you are better able to focus on others. I'm 54 and haven't had a mortgage in over 10 years.

Another consideration is; is this house your 'forever' house or will you continue to buy up or down before you retire? If not your forever house, maybe it's best to just use the house as a leverage instead of that portion of your retirement that guarantees housing for the foreseeable future.
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Old 10-08-2011, 08:54 AM   #8
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No doubt that it will reduce the term considerably (see the calculators others linked for the exact number).

The bigger question is - will this be economically advantageous to you? You can read the many threads on this, but the readers digest version seems to be very little (if any) economic advantage, and one must consider if the loss of liquidity could be an issue for them.

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Having a zero on the mortgage is a BIG deal psychologically.
I would say: "Having a zero on the mortgage is a BIG deal psychologically - for some people."

For others, having all that money tied up in their house, with less liquidity/options is a BIG deal.

To each their own - but please don't ignore the liquidity issue - that can be a real trap for some people, and lead to real (not psychological) negative consequences.

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Old 10-08-2011, 09:15 AM   #9
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Paying off mortgage early may dovetail nicely with kids going to college, R.E. taxes increasing, etc. You have increased cash flow. For instance, our R.E. taxes are double what they were 15 years ago. Paying off mortgage in 8 years or so was a great decision by wife.
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Old 10-08-2011, 02:23 PM   #10
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Paying off mortgage early may dovetail nicely with kids going to college, R.E. taxes increasing, etc. You have increased cash flow. For instance, our R.E. taxes are double what they were 15 years ago. Paying off mortgage in 8 years or so was a great decision by wife.

Of course, if you didn't pay off your mortgage early and funneled that money into investments with reasonable liquidity to be available for kids going to college, RE taxes increasing, etc, you'd also have increased cash flow.

As ERD50 says, there seems to be very little economic advantage to paying off a low interest rate mortgage early as long as your alternative uses for the money are prudent and appropriate. But, if it makes you feel better, by all means pay off the mortgage.

I paid mine off early. But other than the fact that falling interest rates made my old mortgage uncompetitive and it would have needed to be re-fi'd, there was no particular financial advantage to paying it off early of any consequence.
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Old 10-08-2011, 07:14 PM   #11
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Just because you have paid off your mortgage, doesn't mean that it's value is all locked up. I've recently gotten a line of credit for my paid-for house. It's $300,000 and the interest rate is 4% if and when I ever decide to use any of it. (The amount of the line of credit is maximum 80% of the home's appraised value. The interest rate is prime plus a margin that's based on your credit report.) The HELOC costs me $50 a year to keep it open unless I actually borrow against it, then that fee is waived. Now, if the market ever recovers, I can borrow at 4% while my investments continue to, hopefully, earn more than that. Plus the interest is tax deductible.
Best of both worlds; my retirement accounts can continue to grow, tax deferred, and any money I choose to borrow is at a low 4% and tax deductible as well.
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Old 10-08-2011, 08:28 PM   #12
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Just because you have paid off your mortgage, doesn't mean that it's value is all locked up. I've recently gotten a line of credit for my paid-for house. ...
That is an option, but be careful. We had a thread a while back - when the poster went to tap his HELOC, the bank had cut the available credit.

If your $50 annual keeps it open, then you've handled that. But I'd wanna read all the fine print very, very carefully.

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Old 10-08-2011, 08:57 PM   #13
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That is an option, but be careful. We had a thread a while back - when the poster went to tap his HELOC, the bank had cut the available credit.

If your $50 annual keeps it open, then you've handled that. But I'd wanna read all the fine print very, very carefully.

-ERD50
That is good advice, ERD50. I had my CPA/tax man look it over before I returned anything.
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Old 10-09-2011, 07:35 AM   #14
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The HELOC costs me $50 a year to keep it open unless I actually borrow against it, then that fee is waived. Now, if the market ever recovers, I can borrow at 4% while my investments continue to, hopefully, earn more than that. Plus the interest is tax deductible.
Best of both worlds; my retirement accounts can continue to grow, tax deferred, and any money I choose to borrow is at a low 4% and tax deductible as well.
Sounds like you've already borrowed a balance of $1250 for as long as the HELOC is in effect.

Can you "borrow" a buck on your HELOC to have an outstanding loan balance of $1, and still have the $50/year fee waived? Or is there some minimum HELOC balance before that's waived?

I like HELOCs, but they can't compare to 30-year loans when the interest rates are similar.

Covering a mortgage without losing your ass(ets).
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Old 10-09-2011, 07:49 AM   #15
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I did a bunch of calculations when I paid my mortgage off early. Including putting that money in my investments to the tune of $2600 a month. Except after 3 years of sticking that money away, I realized that I could retire early. So paying a mortgage off early may be a dangerous thing.
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Old 10-09-2011, 08:24 AM   #16
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We are paying an extra $500/month towards the principal and will have our 30-year loan paid off in 16 (12 years from now). I'll have it paid off when I am 54, then I can start funneling all the money that was going towards the house into investments & cash.
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Old 10-09-2011, 08:52 AM   #17
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Will i really shave off 8yrs of my mortgage by sending in an extra payment? If so, is it better to send in one big payment on the principal at the end of the year or a little bit each month?
The difference an extra payment will make on the payoff depends in your interest rate. A few years ago when rates were 7-8%, making an extra payment would have reduced your term by 7-8 years but with interest rates around 4%, it makes less of an impact (about 4 years). The difference between paying 1/12 of the payment monthly or 1 extra payment at year-end is nominal so I suggest doing whatever is convenient.

Another consideration is whether you should refinance and shorten your term. For example, if you have a 30-year note and are paying enough extra to pay it off in 22 years, maybe a 20-year fixed mortgage is a better option since interest rates are lower. The big caution with this strategy, of course, is that you commit yourself to a higher payment. So I would only consdier this if your cash flows are very good and don't risk putting yourself in a position where you could lose the house if you were be out of work for a while.
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Old 10-09-2011, 11:33 PM   #18
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Long ago, we paid off our 10% mortgage early. We paid a few bucks to the loan holder (it was a lot simpler back then) to get a printout of our mortgage payments to go. It was a line by line list of each payment to come, showing what $ for Principal, and what $ for Interest.

So each month, we would send in the current principal and interest amount, plus an integral number of months of Principal payments all added up.

So we could then cross off the current principal amount, and advance X number of months into the future for next month's principal payment. By making only integral month(s) of extra Principal payment, it kept it very easy to keep track. And easy to see when into the future that the value of X would need to be reduced as Principal payment line values grew higher, and determine when to drop a month off of the value of X.

In the early part of the loan, an extra month's Principal was very cheap! And the opposite as the end of the mortgage approaches. I think we paid it off in 8 or 9 years, we did not know about prepayment until we were a couple years into it, at least.

In retrospect, a 15 year loan would have been another way to do it, would have gotten some interest rate break for that. But at the time of initiation, we would not have been able to afford the higher payments of a 15 year loan. As it turned out, the 30 year with prepaying allowed us to boost up the Principal payments when we could, and ease off if we needed to. With the higher monthly payment of a 15 year, we would have no choice but to pay the increased amount due every month.
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Old 10-10-2011, 04:15 AM   #19
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Discipline is the key

I do not suggest making an extra payment at year end as there may be too many reasons not to actually do it. Far better is to obtain your 20 or 30 year mortgage but calculate the monthly payment needed to pay off at the date you select. Then automate that monthly amount and forget about it. Worked well for me. Tomorrow my final payment will be made on a 20 year mortgage that I have paid off in 14 years. I timed it to be finished when I have some college bills to consider.

As with any financial (or life) matter, personal discipline is the key.

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