DIFFERENT mortgage payoff question

[Texas Proud]

Took out my mortgage in 1984. 30000.00 @ for 30 years at 10.75%. That was a good rate at the time. I knew I needed to not take 30 years to avoid all that interest. When I looked at my amortization schedule I saw that if I increased my monthly payment by 50.00 on the 1st payment, I suddenly only had a 29 year mortgage. Paid extra 50.00 each payment and then a lump sum and mortgage was retired in seven years. Debt free ever since.

Yea, those were the days.... it seems so strange now with the interest rates so low and nothing is sight to make them go up that high again...

I had you beat though... not exactly sure, but IIRC I was at 60,000 and 11.5% interest... and that was a special tax program for first time home buyers... I refied that loan twice that I can remember...

Like you, I was paying that down..... but once I got it down into the 6% range I just paid my required pmt....

 

[pb4uski]

Wow... I am a bit surprised how many people actually do something to pay their mortgage....

When I signed mine, I set mine for autopay with my bank for 179 pmts... have not done anything for 3 or 4 years except make sure money is in the bank...

+1, but at 3.375% I'm in no hurry to pay it off.

 

[pb4uski]

Yea, those were the days.... it seems so strange now with the interest rates so low and nothing is sight to make them go up that high again...

I had you beat though... not exactly sure, but IIRC I was at 60,000 and 11.5% interest... and that was a special tax program for first time home buyers... I refied that loan twice that I can remember...

Like you, I was paying that down..... but once I got it down into the 6% range I just paid my required pmt....

That's nothing... our first mortgage was in 1984 and was 13%.... ouch... pains me to just think about it. One good thing though, between house changes and refinancing we have had probably 9 mortgages over the years and our mortgage rate has never gone up... just down.

 

[rayvt]

Wow... I am a bit surprised how many people actually do something to pay their mortgage....

When I signed mine, I set mine for autopay with my bank for 179 pmts... have not done anything for 3 or 4 years except make sure money is in the bank...

+1
I set mine up for autopay and never look at it. Once a year the bank refigures the escrow and tells me the new payment -- which rarely is more than a few dollars different (this year it was 6 cents).
I go into my bank account bill pay and enter the new payment, done and done for another year.

 

[rayvt]

We used the original paper printed copy of mortgage, and sent in the coupons. Always paid the exact principal required for future months. Then we knew where we were in the schedule.

Yes, this is the easist way to do it.

When you make an extra principal payment, you skip ahead in the amort table. If you make the exact amount of the principal on the next line n the table, you have saved the interest amount on that line.
The downside is that you have shaved one payment off, but it is the very last payment, so it won't come until 15-20-30 years from now.

But... this is not the best way to prepay the mortgage. You are better off making a "Mortgage Freedom Acount" where you put those extra payments, keep to the scheduled mortgage payments, and then pay off the mortgage in one fell swoop when the MFA balance in enough to pay off the mortgage.

That way, you keep the money in your hands and not in the hands of the bank. And if you hit a rough patch and can't make the regular payment you can use the MFA account as the source of funds to make the payment. Because if you don't make the monthly payment the bank will foreclose on you and you'll lose everything, even the extra principal payments you voluntarily paid. They won't give that back to you.

 

[pb4uski]

+1
I set mine up for autopay and never look at it. Once a year the bank refigures the escrow and tells me the new payment -- which rarely is more than a few dollars different (this year it was 6 cents).
I go into my bank account bill pay and enter the new payment, done and done for another year.

+2 When we refinanced I set up a recurring monthly transfer from my bank to the servicer for the monthly payment and have set it and forgot it... other than having to change it twice in 5 years because the servicer changed.

 

[Texas Proud]

+1
I set mine up for autopay and never look at it. Once a year the bank refigures the escrow and tells me the new payment -- which rarely is more than a few dollars different (this year it was 6 cents).
I go into my bank account bill pay and enter the new payment, done and done for another year.

I have no escrow so mine is the same for all payments.... never have to do anything!!!

 

[UpAnchor]

Took out my mortgage in 1984. 30000.00 @ for 30 years at 10.75%. That was a good rate at the time. I knew I needed to not take 30 years to avoid all that interest.

Yea, those were the days.... I had you beat though... not exactly sure, but IIRC I was at 60,000 and 11.5% interest... and that was a special tax program for first time home buyers...

That's nothing... our first mortgage was in 1984 and was 13%.... ouch... pains me to just think about it.

Luxury!!

In my day they wanted 17% for a fixed so I swallowed hard and signed on the dotted line for a 15.5% adjustable. Thankfully, rates soon turned around and I was glad I hadn't locked into the fixed. But I was young and naiive and any favorable outcome was due more to luck than brains...

 

[harley]

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.

Careful with those gentle corrections. School Administrator Fired for Correcting Student's Spelling

On Jan. 5, a student tweeted to the Twitter account, @FCPSMaryland, asking schools to close “tammarow.”

Nash wrote in response from the school Twitter feed: “But then how would you learn how to spell ‘tomorrow?’ ”

 

[pb4uski]

That's bloody ridiculous that she was fired... I thought her response was wholly appropriate... made a good point...witty but not disparaging.

 

[Sue J]

That's nothing... our first mortgage was in 1984 and was 13%.... ouch... pains me to just think about it. One good thing though, between house changes and refinancing we have had probably 9 mortgages over the years and our mortgage rate has never gone up... just down.

Yep, ours was $45,000 at 12 3/8% for 30 years in 1983. We refinanced when rates dropped to 9% and then again at 7%, never going longer than our original date. Paid it all off early, before DH retired.


Sent from my iPad using Early Retirement Forum

 

[calmloki]

Was a bit obsessive about mortgages. With the rentals we always had at least two paying down and I was rabid about sticking every spare cent on the highest interest loan, paying it off, then rolling the spare money into the next loan. The gal's ahHAH! moment was when she found a free program called Zilch (still out there - now they want $40 - madness!). Zilch showed just how much time and money was saved by doing that sort of debt snowballing.

My biggest debt agony was when we bought our biggest multi and they wanted both an escrow account for taxes and insurance AND had a three year early payoff penalty.

 

[bingybear]

When I prepaid my mortgage decades ago one needed to tell the processor to apply the over payment to principal. They may do that automatically now or there may be regulation that stipulate that... it only makes sense... at least to me. But I would tell them anyway.

I guess someone might prepay so they did not have to make some number of payments... like when they are going on vacation. But applying to principal would have them missing payments.

But as noted above... attacking the principal early will cut down the total loan payments significantly.

 

[poorcarver]

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.

 

[CardsFan]

Luxury!!

In my day they wanted 17% for a fixed so I swallowed hard and signed on the dotted line for a 15.5% adjustable. Thankfully, rates soon turned around and I was glad I hadn't locked into the fixed. But I was young and naiive and any favorable outcome was due more to luck than brains...

And the "conventional wisdom" at the time was that we would never see interest rates below 10% in our lifetime

 

[enginerd]

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.

 

[rayvt]

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.

 

[bingybear]

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.

 

[rayvt]

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.

 

[scrabbler1]

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.