Home refinance advice

[3d]

davester wrote:
[quote=mattkime]
>>It can't be done. Felix isn't correct. Mortgages don't work that way. Actually, there is a tiny benefit to making extra payments in that the proportion of interest to principal goes down a tiny bit for every extra payment. Hardly enough to make a difference though and you also lose a little bit of a tax deduction with that reduced interest.

Then how do you pay it off early without paying the full 30 years of interest?

Hey, guess what, I'm wrong, and so is 3d. Sorry Felix, I misread your statement. When you make an extra principal payment it is the same thing as paying your next payment ahead of time since the principal on the loan is reduced. This means that you remove that next payment and bump the entire amortization schedule one month closer.
Is there a link somewhere to support that? I'd like to read up on it.

[davester]

Here, use the mortgage extra payment calculator linked to at the beginning of this article: http://www.mortgagecalculatorsplus.com/a...rtgage.php

[3d]

@ davester, I think we're all talking about the same thing.

150,000 mortgage
30 years
5%

Monthly payment $805.23

Payment 1: $805.23 = Principal $180.23 + Interest $625.00
Payment 2: $805.23 = Principal $180.98 + Interest $624.25
Payment 3: $805.23 = Principal $181.74 + Interest $623.49
....
Payment 359 : $805.23 = Principal $798.56 + Interest $6.67
Payment 360 : $805.23 = Principal $801.89 + Interest $3.34

When you make that extra principal payment everything is bumped up a month but the interest is still lopped off the back end. You don't have to pay that last month of interest.

Or is this completely wrong? Ughh.. no wonder I leave the bill paying to the wife :-P

[Mac1337]

Backend, front end. You make extra payments and those reduce your principle. That is what I have always understood. Losing them? No way.

[JoeH]

3d wrote:
Or is this completely wrong? Ughh.. no wonder I leave the bill paying to the wife :-P

You have it partly wrong, and yes you should leave the bill paying to your wife. Basically you have neglected the effect of interest compounding. The mortgage contract specifies a monthly payment to amortize the principal and interest of the full length of the contract. By paying extra towards the principal, you take off not just the last months interest, but several months worth depending on the amount. And the earlier in the mortgage you do it, the greater the effect.

As an example using simple annual interest, if you pay an extra $1,000 now towards the principal, it reduces the interest charge in the next year by $50 if you have a 5% loan and pays off an extra $50. The follwing year, the interest savings is $52.50. $55.12 the next year, and so on. By contract your monthly payment is fixed, so you do not pay less because of the pre-payment of principal, but added up over the years it gives you months or years of not paying that amount at the end of the mortgage.

Now, if you can find a better investment, then you would put your money into that instead of paying extra towards your mortgage. That is easier now with mortage rates in the 4-5% range, but was less attractive when the rates were higher.

[Psurfer]

Additional principle payments absolutely do reduce the amount of interest you end up paying. The earlier you start those addt'l pymnts in the life of the loan, the more dramatic the benefit down the line.

I've made just small addt'l princ pymnts (an amount to round up the total pymnt to an even hundred-increment) -but consistently every month from the very first- and this summer will enjoy paying the very last payment, nearly 8yrs ahead of schedule.

[Don C]

I have been adding to my Chase mortgage each month, and the extra seems to be paying the principal directly. There are two pieces of evidence to support this.

1. The monthly statement has two lines, one giving the contract payment amount broken into interest and principal and the second line is the extra amount listed as a principal.

2. I created a mortgage amortization table in which I can change the amount paid any time I make a change and the amount that Chase says is going to interest is exactly what my table says it should be. My calculations are based on the extra paying down of principal and monthly interest being based on that new lower amount. Paying a couple of hundred bucks extra a month will shortened the mortgage by 10 years and reduce interest by more than $22K.

I think of this as making 6% interest on each extra payment (6% I am NOT paying out) which is quite a bit more than I could make putting it into a CD or MM. Since I am retired, I would not be putting it into an IRA.

[SDGuy]

Well, I hope dotman came back to read this thread again, now that all of you have completely done a 180 on the advice you've given him on prepaying the principal...

dotman - listen to what JoeH & Psurfer said (assuming you're considering paying extra towards principal on your current mortgage vs. refinancing).
Also - be sure to look at an amortization table of your current mortgage, and where you're at on it (i.e. amount of payment going towards interest vs. principal).