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Old 01-16-2017, 11:27 AM   #41
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Thanks for this thread, it got me thinking about where I am at in the life of my mortgage. I usually throw a little extra at the principal when I have some spare money laying around without putting too much thought into an overall goal of when the mortgage is paid off.

So, I started playing around with several of the calculators last night to see how many years I had left. But the numbers weren't adding up right. My monthly payment seemed to be too high for my initial mortgage amount and interest rate. I actually had to go back and dig out my loan documents to see that...Oh Yeah!...I actually started with a 25 year loan when I refinanced, not the 30 years I thought. I had a moment and then a moment as I realized I had 5 years less than I was thinking.

Anyway, I now have a goal and a plan to pay it off early. Should be about the same time the oldest is heading to college.
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Old 01-17-2017, 08:20 AM   #42
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Originally Posted by bingybear View Post
I guess someone might prepay so they did not have to make some number of payments... like when they are going on vacation.
It doesn't work that way. Whatever you pay goes toward the current month, not future months.
We checked into this when we were going on a 4 month cruise. You have a payment due each and every calendar month.

Credit cards work the same way --- just because you make a payment that is 3 times the minimum payment that doesn't mean you can skip the next 3 payments.

Thank goodness we now have automatic bill pay, so you can schedule future payments.
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Old 01-17-2017, 08:37 AM   #43
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Originally Posted by rayvt View Post
It doesn't work that way. Whatever you pay goes toward the current month, not future months.
We checked into this when we were going on a 4 month cruise. You have a payment due each and every calendar month.

Credit cards work the same way --- just because you make a payment that is 3 times the minimum payment that doesn't mean you can skip the next 3 payments.

Thank goodness we now have automatic bill pay, so you can schedule future payments.
Back in the 80's there were some mortgage companies that would not apply extra payments directly to principal. I'm not saying it is that way now. But I would still document the the intention to pay principal.. but that is just me after having a mortgage processor not apply it as I wanted... back in the 80's. When I paid off my mortgage in the early 90's I was told to explicitly state with the payoff check that the intent was to pay off the mortgage or they would not process it as such. This was a major national bank.

Since I don't just pay the min on my credit cards, it really does work to pre-pay 3 months and go on vacation and not make payments while on vacation. Obviously an auto pay set up is better.
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Old 01-17-2017, 09:16 AM   #44
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Originally Posted by poorcarver View Post
As a slight twist on either saving the pre-pay yourself until the end or pre-paying every month, we saved up each year. Then said well we made it this far, no crisis present, so we then pre-paid the year's savings. And so forth. Not as dramatic as the monthly item but more advantageous than the wait till the end.
That doesn't really help you. As soon as you make that annual pre-payment your "made it this far" safety account is back down to zero. If a crisis hits the next month, you are in the same position as if you didn't have that side account.

Financially, it is indeed better to pay the principal down as quickly as possible. But things have to be examined from a risk vs. reward viewpoint.
The reward is paying less interest in total.

The risk is that if you miss a couple of payments you lose the house and you lose all the money you put into it.

The net time the mortgage is shortened by isn't as large as it seems, either.
Looking at a mortgage & savings calculator,
$200K loan at 4.5%, 30 yr, pay extra $100/mo cuts 5 years off the loan. Paid off in 25 years.

If instead that $100/mo goes into savings/CD account earning a blended rate of 1.5%, it will grow large enough to pay off the remaining mortgage balance in 26.5 years.

25 years vs. 26.5 years. And after the first year, the savings account has enough money to make 1 or more payments in case you get laid off and can't make the payment.
Small reward vs. large reduction in risk.
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Old 01-17-2017, 09:18 AM   #45
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I have some mortgage stories to add here, many of which are similar to those others have written in this thread.

I got my first mortgage back in 1989 for my co-op apartment. It was a 5-year ARM with an interest rate of 10.75% and a 30-year term for $56k. By late 1991 interest rates had fallen a lot so I did a refi into a 1-year ARM for 6%, saving me over $200 per month.

I had a minor ordeal with the new lender during my closing but I also faced another snag in the timing of my closing and the closing a few days later between the two lenders because they would both occur in the same month and before my next mortgage payment would be due. I would have had to provide a bank check to the old lender for a partial month's interest which would be a PITA. Instead, I was told I could simply pay that month's payment the way I always had (via mail, this was in 1992, before autopays were in great use), a month before it was due so it would be credited to my account well before the closing.

I made that payment, along with $3k in principal because I was slightly reducing my new loan. We had those preprinted payment books back then, so it was easy to distinguish additional principal on each payment from the regular payment. Not only did this solve the aforementioned problem when the two lenders met after my own closing, but it resulted in my receiving two small checks, one from each lender. The first was from the old lender for a small overpayment in interest for the few days between the closing of the two lenders and the end of the month for which I had prepaid interest. The second was from the new lender because I did not actually owe them $52k, the amount of the new loan. The prepayment of principal slightly altered the amortization schedule so that the old lender was actually owed a little less than $52k by the new lender to pay off the loan. So the new lender mailed me a check for the difference. Each check was for less than $100 but it was nice to actually receive a few checks after all the checks I had written related to the refi itself!

Now with the new loan, a 1-year ARM, my interest rate changed once a year in May. But knowing how interest and principal were allocated in each payment (the way others described in this thread), I was able to determine the total amount of interest paid for the year once I learned of the new rate in late April. And when I received the 1098 form the following February, it matched my spreadsheet down to the penny! The new lender soon set up an autopay program which I quickly enrolled into.

I had also created a spreadsheet to compare the money saved by doing a refi versus the money it cost me to do a refi. On the saved side I looked at interest paid after netting out any lost savings due to reducing the tax deduction on both the state and federal returns, and netting out the effect of paying more in state income taxes on the federal return. On the cost side I looked at the lost interest from the tax-free bond mutual fund used to pay the extra principal up front versus the added interest in that fund by investing the extra $200 per month saved by doing the refi. I also included the costs of the refi to see how fast I would recover those costs which was about 18 months, a reasonable time.

In 1997 and 1998, I repeated the analysis I did in 1992 but this time it was to pay off the mortgage, not do a refi. I now had the money to pay it off without overly draining my portfolio which had grown a lot as the 1990s boom was in full force. A key thing which tipped the scales toward paying off the loan was seeing my state itemized deduction decline down to nearly the standard deduction. Therefore, losing the rest of it would have no offsetting state income tax increase.

I paid off the loan in 1998 and have been debt-free ever since.
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

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