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New house- best way to pay off early?
Old 11-14-2010, 10:36 PM   #1
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New house- best way to pay off early?

I read a lot of articles about paying a mortgage off early. What is best?

1) bi weekly payments? I'm not quite following this one. Does it work like this: my first payment is due on 1/1/10 and I take possession on 12/1/10. Would I pay the whole payment on 1/1/10, and then half on 1/15/10, the other half on 1/30/10, and so on? The bank will apply the payment when received. How many years will this save me? And how?

2) pay $50 extras each month the first year, then $100 the second, and so forth. How many years will this save me?

Any others?
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Old 11-14-2010, 10:47 PM   #2
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When I bought my first house, I was given an amortization print out of all the future payments. I was told that I could make a full normal payment each month and add as many principal only payments in as I could afford. You could save a lot of interest money this way and pay it off really early. Probably need to talk with whoever you are making your payments to. So everyone involved is on the same page.
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Old 11-14-2010, 10:55 PM   #3
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Here is a good online calc I found

Amortization Schedule Calculator

so you put in your current loan amount and rate, then there is a spot to add an additional amount each month/year whatever.

hit 'run schedule' and it will then show you an chart showing payments with that extra amount. But if you then hit the button that shows 'show me comparative schedule' you can see how much you save relative to your original loan!

I like this site as you can play around with loan amounts and prepayments,etc. Good luck!
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Old 11-14-2010, 11:14 PM   #4
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Monthly payments occur twelve times a year on the same day each month.

Bimonthly payments occur twenty four times a year on the same two days each month. Assuming the same payment, bimonthly will pay off your mortgage twice as fast as monthly.

Biweekly payments occur every fourteen days, or 26+ times a year. Assuming the same payment, biweekly will pay off your mortgage the fastest.
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Old 11-14-2010, 11:16 PM   #5
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Quote:
Originally Posted by JohnGalt View Post
I read a lot of articles about paying a mortgage off early. What is best?
1) bi weekly payments? I'm not quite following this one. Does it work like this: my first payment is due on 1/1/10 and I take possession on 12/1/10. Would I pay the whole payment on 1/1/10, and then half on 1/15/10, the other half on 1/30/10, and so on? The bank will apply the payment when received. How many years will this save me? And how?
Any others?
You can waste a lot of time do a lot of research here:
https://www.navyfederal.org/calcs/mortgage-calcs.php
including the "Loan Decisions" Q&A, the "How much can I save if I start biweekly payments?" calculator, and the "How much faster can I pay off my mortgage by increasing my payments?" calculator.

First let's assume that "pay off the mortgage" is the way to go. If I were you I'd pay extra points for the lowest possible rate on a 30-year fixed-rate mortgage with just a monthly payment, and then keep an eye on CD interest rates. If hyperinflation CD rates take off then I'd make the absolute minimum monthly payments on the mortgage and invest the rest of your spare cash in CDs.

You could get a 15-year loan (or even shorter) or have the lender set the biweekly payment requirements, but then you're playing the game by their rules instead of being able to change your own. By getting a fixed-rate long-term conventional mortgage, you can tailor the payment plan to your particular situation and its unemployment changes instead of having to commit to the lender's shorter terms or bi-weekly payment plan.

Many years ago when we had a bi-weekly payment plan with NFCU, we paid the first month's interest at closing (on 1 Dec in your example). Then on 1 Jan we paid a half-month's payment and on the 15th we paid another half-month's payment. But a better way (from the lender's perspective) would be to collect half a payment on 15 Dec and the other half on 30 Dec, so you'd have to check very carefully which option they plan to do.

Another choice would be to send in half a payment (or more) every other Monday. This would actually result in 26 actual biweekly payments per year instead of 24 semi-monthly payments. This could quite possibly confuse the heck out of the lender, though, so it's probably best to stick with their 24 "bi-weekly" payments.

Another option more under your control, though, would be to send in that extra $50-$100 every other Monday or every payday. Or if you get a bonus payment then send in a large portion of that toward your mortgage principal. Most lenders require these payments to be clearly marked "additional principal" or they'll just credit the payment to the accrued interest (which leaves the principal unchanged and allows more interest to accrue on the higher principal). I even ran across one slimeball lender in the 1980s who would put extra payments in the taxes/insurance impound account until it was at 100% and then credit the accrued interest before finally crediting the principal.

Before you accelerate your mortgage you might want to make sure that you obtain your full 401(k) match and (if applicable) your full deduction on your conventional IRA. That depends on your 401(k) match, your income tax bracket, and whether you're able to itemize deductions.
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Old 11-15-2010, 07:21 AM   #6
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I always had 15 year mortgages because I wanted the loan paid off before too long. Last November I refi'd again to a 5/5 ARM with a 30 year term. I make monthly payments that are almost triple what the sched minimum is because that is the level I want to amortize the loan (and it is about what I paid on the last 15 I had). I also made some lump sum paydowns last year, but I am done with that. If I am in the house that long, by the time the mortgage adjusts, the balance will be about the size of a car loan, so the rate move won't matter.

I built my own spreadsheet to examine paydown patterns, contrast different loan structures, etc. You get transparency and flexibility when you build from scratch, and mortgage amorts are simple. Figure out your goal and use a sheet or calculator to figure out how to get there.
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Old 11-15-2010, 02:00 PM   #7
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You didn't provide enough info about your mortgage like its timeline and %. Maybe it's not even worth it paying off early. E.g. my coworker had a mortgage at 5% and 17 years remaining. Last week she refinanced to a 15-year mortgage at 3.8% that will save her $34/mo. I'd say this kind of mortgage is too good to pay off
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Old 11-15-2010, 03:00 PM   #8
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We just paid off our 30 yr fixed rate loan. Did it in about 14 years. No great trick to how we did it. Periodically (once or twice a year) made extra payments on the principal. Whenever we got a windfall, half went to the loan and the other to our investments (This wasn't very often). Then, when we noticed we could comfortably pay it off without dipping too far into our other investments, we made the move. Felt great.
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Old 11-15-2010, 03:30 PM   #9
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We went with the 15 year mortgage. Not sure how much difference it makes these days but the difference in the amortization and budgeting the monthly payments made it a no brainer.
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Old 11-15-2010, 07:16 PM   #10
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I was going to weigh in on this, but Nords' advice is, in my opinion, spot on. I've had both 30 year fixed and 15 year fixed mortgages. (Never had a variable rate mortgage.) I think the smartest thing to do is to get a 30 year mortgage with the lowest possible monthly payments and then send in a lot of "principal only" payments to shorten the term.
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Old 11-16-2010, 06:49 AM   #11
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paid off my 15 year note is less than six years by paying double PI payments...
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