Extra Mortgage Payment

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Extra Mortgage Payment

Postby Bedrock » Mon Dec 24, 2012 1:25 pm

Hi everyone - new member here. I am in a dilemma whether to send an extra mortgage payment or not this year. I was told that if you send an extra payment every year, you can pay off your mortgage payment from 30 yrs to 22 yrs - 8 yr earlier!! I have been sending the extra montly payment end of December for the last 3 yrs.
However, now I am wondering if this is a smart move. Since I do not have an financil advisor yet, I came here to get an answer.
Thanks in advance for any response.
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Re: Extra Mortgage Payment

Postby dm200 » Mon Dec 24, 2012 2:35 pm

Bedrock wrote:Hi everyone - new member here. I am in a dilemma whether to send an extra mortgage payment or not this year. I was told that if you send an extra payment every year, you can pay off your mortgage payment from 30 yrs to 22 yrs - 8 yr earlier!! I have been sending the extra montly payment end of December for the last 3 yrs.
However, now I am wondering if this is a smart move. Since I do not have an financil advisor yet, I came here to get an answer.
Thanks in advance for any response.


If you have the funds available to pay extra principal and those extra funds are earning less than the rate you pay on the mortgage, then if might make sense to pay it down. Think longterm though. One you make the etra principal payment, you still need to make the regular monthly payments for the life of the loan -- you can't unring that bell.
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Re: Extra Mortgage Payment

Postby runner9 » Mon Dec 24, 2012 2:36 pm

What is the interest rate on the mortgage?

Personally I'd say go for it but opinions vary, and the mortgage rate is a big part of that for sure.
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Re: Extra Mortgage Payment

Postby grabiner » Mon Dec 24, 2012 5:27 pm

Welcome to the forum.

You might want to look at this Wiki article: Paying down loans versus investing

The key point is that the extra mortgage payment is using some money, and the money could be used for something else. Instead of making an extra mortgage payment, you might contribute the money to your IRA or 401(k). This is a purely financial decision: which is the better use of your money?

For example, if your employer matches your 401(k) contributions, that is surely a better use of your money, as $1000 contributed to the 401(k) becomes $2000 immediately and then grows tax-deferred.

Similarly, if you are going to buy a new car in a few years, you could save the money (probably in a CD or money-market fund) so that you can pay cash for the car. Instead of saving on mortgage interest, you would save on car loan interest, and that is better because car loans are not tax-deductible while mortgage interest often is.

On the other hand, if your mortgage is at a high rate and you can't refinance it, then paying down the mortgage is a good use of your money; you save high-rate interest, and you are also paying down the principal toward the point at which you can refinance for a lower rate or get rid of mortgage insurance.

So, if you would like better advice, post the terms of your mortgage, and the alternative uses for your money. We suggest you use the format in Asking Portfolio Questions
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Re: Extra Mortgage Payment

Postby Bedrock » Mon Dec 24, 2012 5:54 pm

thanks everyone for the response. APR is 5.25 and no PMI. I am maxing out on 401K and HSA contribution. I can afford to pay an extra monthly payment but thinking if that money could be better off somewhere.
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Re: Extra Mortgage Payment

Postby sscritic » Mon Dec 24, 2012 6:30 pm

Are you paying an extra payment or paying extra principal? If you just send in an extra payment of principal and interest, some banks may just treat it as being early; e.g., your extra December payment is your January payment, your January payment is your February payment, etc. Make sure that the whole payment goes to principal.
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Re: Extra Mortgage Payment

Postby CloveLeaf » Mon Dec 24, 2012 6:51 pm

Bedrock wrote:thanks everyone for the response. APR is 5.25 and no PMI. I am maxing out on 401K and HSA contribution. I can afford to pay an extra monthly payment but thinking if that money could be better off somewhere.

You should refinance. 5.25 is way too high. Then you might be able to pay an extra payment AND fully fund your IRA.
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Re: Extra Mortgage Payment

Postby Bedrock » Mon Dec 24, 2012 6:51 pm

sscritic wrote:Are you paying an extra payment or paying extra principal? If you just send in an extra payment of principal and interest, some banks may just treat it as being early; e.g., your extra December payment is your January payment, your January payment is your February payment, etc. Make sure that the whole payment goes to principal.


thanks. it is going towards extra principal (and I have no early payment penalty).
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Re: Extra Mortgage Payment

Postby Bedrock » Mon Dec 24, 2012 6:54 pm

CloveLeaf wrote:
Bedrock wrote:thanks everyone for the response. APR is 5.25 and no PMI. I am maxing out on 401K and HSA contribution. I can afford to pay an extra monthly payment but thinking if that money could be better off somewhere.

You should refinance. 5.25 is way too high. Then you might be able to pay an extra payment AND fully fund your IRA.


it was refi from 5-1ARM. I was able to refi under HARP in May 2010 and alas the interest rate weren't as low as they are now! I can't refi again since I don't have any equity or have money to put downpayment.
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Re: Extra Mortgage Payment

Postby grabiner » Mon Dec 24, 2012 7:52 pm

Bedrock wrote:
CloveLeaf wrote:
Bedrock wrote:thanks everyone for the response. APR is 5.25 and no PMI. I am maxing out on 401K and HSA contribution. I can afford to pay an extra monthly payment but thinking if that money could be better off somewhere.

You should refinance. 5.25 is way too high. Then you might be able to pay an extra payment AND fully fund your IRA.


it was refi from 5-1ARM. I was able to refi under HARP in May 2010 and alas the interest rate weren't as low as they are now! I can't refi again since I don't have any equity or have money to put downpayment.


In that case, putting extra payments toward that mortgage is a good idea, as long as you have an emergency fund available. If you are in a 28% tax bracket and deduct your mortgage interest, you earn 3.81% risk-free and tax-free. In addition, you build more equity by paying down the principal, so that you may be able to refinance in a few years. And since you can currently afford extra payments, you may be able to reduce the interest rate and mortgage duration further by refinancing to a 15-year term.
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Re: Extra Mortgage Payment

Postby Outer Marker » Wed Dec 26, 2012 9:23 am

Agree making the extra payments makes a lot of sense in your case. How badly under water are you on the current mortgage? Might you have funds available in the form of a 401K loan, or refinancing paid-off vehicles through PenFed? Getting your rate down into a sub-3% 15 year would generate a lot of savings. I would make figuring out how to do that a top financial priority.
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Re: Extra Mortgage Payment

Postby Momus » Wed Dec 26, 2012 9:30 am

I recently just rate locked 30 year fixed 3.125% no points. 5% is way too high nowadays!
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Re: Extra Mortgage Payment

Postby cheesepep » Wed Dec 26, 2012 9:54 am

Momus wrote:I recently just rate locked 30 year fixed 3.125% no points. 5% is way too high nowadays!


Where did you get that rate?
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Re: Extra Mortgage Payment

Postby Momus » Wed Dec 26, 2012 10:11 am

cheesepep wrote:
Momus wrote:I recently just rate locked 30 year fixed 3.125% no points. 5% is way too high nowadays!


Where did you get that rate?


http://www.zillow.com/mortgage-rates/

The company I found had 300+ reviews, and A+ on BBB, http://www.myersparkmortgage.com/
1st home purchase. Emailed back and forth providing documents for 2 hours and got my GFE, TIL and rate lock confirmation. Also, I got ~$1000 lender's credit on top of that.
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Re: Extra Mortgage Payment

Postby Petunia » Wed Dec 26, 2012 2:41 pm

Momus wrote:I recently just rate locked 30 year fixed 3.125% no points. 5% is way too high nowadays!


Provided you have equity. :wink:

Congrats on your awesome rate!
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Re: Extra Mortgage Payment

Postby NorCalDad » Wed Dec 26, 2012 2:53 pm

PenFed has also floated the 3.125% 30-year rate a couple times in the last two months.

When we were underwater (or thought we were based on Zillow), we made sure to prepay our mortgage. Maybe it didn't entirely make sense based on opportunity costs of investing, but it served as mental comfort knowing we were digging our way out of the hole once we knew we weren't going to short sell or walk away. That put us on a much better path, and looking back we're glad we did that.

I'd recommend prepaying as long as you're underwater and you've decided you won't short sell/walk. If you are too far under that you may have to walk/short sell, then you might not want to sink more money into that hole than you have to.
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Re: Extra Mortgage Payment

Postby Bedrock » Thu Dec 27, 2012 12:35 am

Thanks. Very helpful.
I will follow up on the suggestions. I am about 40k under but slowly coming afloat. Hope to refi if things go well.
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Re: Extra Mortgage Payment

Postby CloveLeaf » Thu Dec 27, 2012 2:05 am

Momus wrote:
cheesepep wrote:
Momus wrote:I recently just rate locked 30 year fixed 3.125% no points. 5% is way too high nowadays!


Where did you get that rate?


http://www.zillow.com/mortgage-rates/

The company I found had 300+ reviews, and A+ on BBB, http://www.myersparkmortgage.com/
1st home purchase. Emailed back and forth providing documents for 2 hours and got my GFE, TIL and rate lock confirmation. Also, I got ~$1000 lender's credit on top of that.

This is an awesome deal. Congrats!
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