Mortgage prepay question - Monthly vs Annually

[quizzer25]

Is there any benefit or not with prepaying say $1500 monthly instead of $18000 annually?

[jlcnuke]

Pay down principal faster = less interest charged due to lower principle balance.

edit: fixed auto-correct's spelling correction

[jlcnuke]

Also, I'm assuming you're talking about extra principal payments and not just trying to make your future payments early.

edit: fixed auto-correct's spelling correction

[Pajamas]

Yes, the faster you pay it, the more you will save in interest. Monthly is better than a lump sum at the end of the year but worse than a lump sum at the beginning of the year. If you are going to put money in to pay off the principal, do so as soon as possible to maximize the effect.

[Admiral]

If annually, make sure it's done in January, not December. The lower the principal balance, the higher the percentage of the payment that goes to the principal versus interest. That's why generally the advice is, if you're going to make an extra payment toward principal in, say, December, you might as well spread it out over 12 months, thus paying down the principal a little each month and lowering the balance.

Assuming you have the money on hand, of course.

[Admiral]

Sorry pajamas, great minds...

[jimb_fromATL]

Why others are saying it ...

Mortgages are compound interest -- effectively in reverse.

The borrower's debt is the lender's investment in an annuity that has a guaranteed interest rate compounded monthly on the unpaid balance, with a guaranteed minimum payment.

Plus, Time is an exponential factor that is more important than Rate in determining the total amount of Interest earned in an investment or paid on a debt.

So ... just as you can earn more interest by investing more money as early as possible, you can avoid paying more interest by paying as much extra as soon as possible to pay down a debt.

Just don't make the mistake of reducing or postponing any tax deferred or tax advantaged investment opportunities like a 401(k) or IRA in order to pay down the debt faster. Because of the exponential effect of TIme and the lost tax advantages, especially if you're paying any significant taxes above the bottom tier, paying off manageable debts too fast can literally cost anywhere from tens to hundreds of thousands to sometimes millions of dollars out of probable future retirement income in exchange for saving only a tiny fraction as much interest on the debt.

My post in this thread has links to lots more discussion and examples.

Also, bear in mind that while you can save a lot of interest and time in debt by paying down the mortgage faster, that money is relatively illiquid. It's somewhat like buying a bond or CD that pays a very good guaranteed rate, but which is very expensive and difficult to cash out before its maturity date. So IMO you need to max out all available tax-deferred and tax-advantaged retirement investments; pay off virtually all other consumer debts except perhaps student loans; and have at least six months to a year of living expenses in liquid assets before you pay extra on a mortgage -- especially at today's low mortgage rates.

jimb

[quizzer25]

Thank you all.

I did annually in March for this year. The best option is doing it in Jan right.

[Watty]

Another option is to save the money up until you have maybe 10 or 20 percent of the loan balance and then see if your lender will "recast your mortage"(Google this). They likely will for a couple of hundred dollar processing fee. If you do this and pay down the mortgage by 10% then your required monthly mortgage payment would be reduced by the same percentage. The length of the loan and the interest rate would stay the same.

That could be important if interest rates go up or there is some setback like a job layoff or a major health problem.

[quizzer25]

Also, I'm assuming you're talking about extra principle payments and not just trying to make your future payments early.

Yes

[jimb_fromATL]

Another option is to save the money up until you have maybe 10 or 20 percent of the loan balance and then see if your lender will "recast your mortage"(Google this). They likely will for a couple of hundred dollar processing fee. If you do this and pay down the mortgage by 10% then your required monthly mortgage payment would be reduced by the same percentage. The length of the loan and the interest rate would stay the same.

That could be important if interest rates go up or there is some setback like a job layoff or a major health problem.

Yep on considering recasting to have the option to drop back to a lower payment if times were to get tough financially in the future. It sort of reduces the risk of having the money tied up in the relatively illiquid home equity, too.

Folks need to be aware that many lenders --who allow recasting at all-- will allow it when you've paid down the balance to their 10% or 20% (or whatever their guideline) lower than the normal schedule, whether it's done in a lump sum or over a long period of time. That means paying as much as you can as soon as you can will still save the most money In the long run.

HERE is a recent thread discussing that and other pros and cons of recasting.

jimb

[jimb_fromATL]

Thank you all.

I did annually in March for this year. The best option is doing it in Jan right.

Assuming the money is intended for nothing but paying down the mortgage, then the best option to save the most money and time in debt is to pay as much as you can as soon as you can with every single payment; not to save it up to pay at some later date. That way you're avoiding paying compound interest on all the money you pay in advance for the remaining life of the mortgage.

What's your current balance, rate, and payment for P&I?

jimb

[vanw]

Yes, the faster you pay it, the more you will save in interest. Monthly is better than a lump sum at the end of the year but worse than a lump sum at the beginning of the year. If you are going to put money in to pay off the principal, do so as soon as possible to maximize the effect.

Can you explain why it's better to make a lump sum payment in the beginning of the year instead of the end of the year? I'm not sure why that would make any difference. Wouldn't the lump sum have almost the same effect if you paid in Dec 2023 or in Jan 2024?

[Tom_T]

Yes, the faster you pay it, the more you will save in interest. Monthly is better than a lump sum at the end of the year but worse than a lump sum at the beginning of the year. If you are going to put money in to pay off the principal, do so as soon as possible to maximize the effect.

Can you explain why it's better to make a lump sum payment in the beginning of the year instead of the end of the year? I'm not sure why that would make any difference. Wouldn't the lump sum have almost the same effect if you paid in Dec 2023 or in Jan 2024?

I think he means it's better to pay in January 2024 vs. December 2024.

[cshell2]

Yes, the faster you pay it, the more you will save in interest. Monthly is better than a lump sum at the end of the year but worse than a lump sum at the beginning of the year. If you are going to put money in to pay off the principal, do so as soon as possible to maximize the effect.

Can you explain why it's better to make a lump sum payment in the beginning of the year instead of the end of the year? I'm not sure why that would make any difference. Wouldn't the lump sum have almost the same effect if you paid in Dec 2023 or in Jan 2024?

I think he means it's better to pay in January 2024 vs. December 2024.

Yes, it's best to do it as quickly as possible, so what month is irrelevant. Of course, then if you're going to save up to pay lump sum in the following December, you may as well just pay it monthly and get it on the mortgage sooner.

[vanw]

Thanks for the clarification Tom_T and cshell2!