Mortgage question

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BogleGoggle
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Mortgage question

Post by BogleGoggle » Tue Aug 07, 2018 12:00 pm

I have a 30 year fixed mortgage. Is it better to over the pay the mortgage every month by say $1,000 or save up larger sums of money to put in at one time? Thanks!

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dm200
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Re: Mortgage question

Post by dm200 » Tue Aug 07, 2018 12:35 pm

BogleGoggle wrote:
Tue Aug 07, 2018 12:00 pm
I have a 30 year fixed mortgage. Is it better to over the pay the mortgage every month by say $1,000 or save up larger sums of money to put in at one time? Thanks!
Whichever you do - make 100% sure the overpayment goes to principal.

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rocket354
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Re: Mortgage question

Post by rocket354 » Tue Aug 07, 2018 1:52 pm

It depends on what you mean by "better." By how you likely mean it (which pays down the mortgage faster?) then paying the $1000/mo is better.

The reason is that every payment you make lowers the principal some and therefore reduces the interest on the next payment, thereby increasing the principal pay-down on the next payment since the payment remains constant. For example you might have something like this (using made up numbers):

Month Payment Principal Interest
1 $1000 $194 $806
2 $1000 $197 $803
3 $1000 $200 $800
4 $1000 $203 $797
5 $1000 $206 $794
6 $1000 $209 $791

If you pay an extra $1000 this month, you immediately jump ahead, so to speak, in the above chart. If you notice months 1-5 the principal adds up to $1000. So by paying an extra $1000 today, you jump now to month 6--you've effectively shortened your mortgage by 5 months, and will pay off $209 with your next payment rather than $194.

If you wait, you are paying interest on what you could have paid down in the meantime. Let's compare these two additional pay-down sequences, both adding to $5000:

$1000, $1000, $1000, $1000, $1000
$0, $0, $0, $0, $5000

The second scenario will cost you more in interest because the $1000 that could have gone in month 1 now has four more months of interest, the $1000 that could have gone in month two now has three more months of interest and so forth. So ultimately, you pay more interest by delaying your payments.

Compound interest on your debt is like a river always working against you and the more you delay fighting it the more downriver you will be when you do.

On the other hand, paying earlier might not be "better" in the sense of "what's the best use of my finances?" If you have a low interest rate on your mortgage and have better investment options or are about to time out on a Roth contribution for the year, then do the other investment or the Roth and hit the mortgage when you are next able. If you want to maintain financial flexibility because there's some uncertainty in your life (new kid, new job, new house, whatever) then wait until you feel on firmer ground to go back to paying down the mortgage.

It all depends on the bigger picture, but in a vacuum, the earlier you can pay down interest-bearing debt, the better.

JoeRetire
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Re: Mortgage question

Post by JoeRetire » Tue Aug 07, 2018 4:33 pm

BogleGoggle wrote:
Tue Aug 07, 2018 12:00 pm
I have a 30 year fixed mortgage. Is it better to over the pay the mortgage every month by say $1,000 or save up larger sums of money to put in at one time? Thanks!
It's better to invest the sums of money according to your asset allocation model until you have enough to completely pay off the mortgage.

Then it's better to sit down and decide if it makes sense to pay off your mortgage (which depends on your mortgage rate, your financial goals, your lack of sleep at night, etc), or to stay invested and leveraged.

Gill
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Re: Mortgage question

Post by Gill » Tue Aug 07, 2018 4:37 pm

JoeRetire wrote:
Tue Aug 07, 2018 4:33 pm
It's better to invest the sums of money according to your asset allocation model until you have enough to completely pay off the mortgage.

Then it's better to sit down and decide if it makes sense to pay off your mortgage (which depends on your mortgage rate, your financial goals, your lack of sleep at night, etc), or to stay invested and leveraged.
Better than what? This advice certainly doesn't apply to every situation.
Gill

JoeRetire
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Re: Mortgage question

Post by JoeRetire » Tue Aug 07, 2018 4:47 pm

Gill wrote:
Tue Aug 07, 2018 4:37 pm
JoeRetire wrote:
Tue Aug 07, 2018 4:33 pm
It's better to invest the sums of money according to your asset allocation model until you have enough to completely pay off the mortgage.

Then it's better to sit down and decide if it makes sense to pay off your mortgage (which depends on your mortgage rate, your financial goals, your lack of sleep at night, etc), or to stay invested and leveraged.
Better than what? This advice certainly doesn't apply to every situation.
It's better than over paying the mortgage every month by say $1,000 or saving up larger sums of money less than the full mortgage to put in at one time.

And no advice applies to every situation.

mortfree
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Re: Mortgage question

Post by mortfree » Tue Aug 07, 2018 5:40 pm

Would it be acceptable to put $260/month extra towards a 30-year mortgage? That’s my plan to accelerate it some.

Roth and 401k maxed.

Trying to see where BHers draw the line in an extra payment towards mortgage.

1000 per month seems high but I’ve done that before on another home.

Just curious

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Toons
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Re: Mortgage question

Post by Toons » Tue Aug 07, 2018 6:01 pm

I don't know.
Pay as much on the mortgage as often as you can.
Eliminate It
Sooner Than Later

:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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pezblanco
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Re: Mortgage question

Post by pezblanco » Wed Aug 08, 2018 8:32 am

JoeRetire wrote:
Tue Aug 07, 2018 4:33 pm
BogleGoggle wrote:
Tue Aug 07, 2018 12:00 pm
I have a 30 year fixed mortgage. Is it better to over the pay the mortgage every month by say $1,000 or save up larger sums of money to put in at one time? Thanks!
It's better to invest the sums of money according to your asset allocation model until you have enough to completely pay off the mortgage.

Then it's better to sit down and decide if it makes sense to pay off your mortgage (which depends on your mortgage rate, your financial goals, your lack of sleep at night, etc), or to stay invested and leveraged.
So, if your asset allocation model is 50/50 stocks and bonds .... and if bonds are returning 1 percent and your mortgage is 5 percent, you recommend investing 50% of your excess money in bonds for 30 years until you have enough saved up to completely pay off the mortgage?

chevca
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Re: Mortgage question

Post by chevca » Wed Aug 08, 2018 9:06 am

rocket354 wrote:
Tue Aug 07, 2018 1:52 pm
It depends on what you mean by "better." By how you likely mean it (which pays down the mortgage faster?) then paying the $1000/mo is better.

The reason is that every payment you make lowers the principal some and therefore reduces the interest on the next payment, thereby increasing the principal pay-down on the next payment since the payment remains constant. For example you might have something like this (using made up numbers):

Month Payment Principal Interest
1 $1000 $194 $806
2 $1000 $197 $803
3 $1000 $200 $800
4 $1000 $203 $797
5 $1000 $206 $794
6 $1000 $209 $791

If you pay an extra $1000 this month, you immediately jump ahead, so to speak, in the above chart. If you notice months 1-5 the principal adds up to $1000. So by paying an extra $1000 today, you jump now to month 6--you've effectively shortened your mortgage by 5 months, and will pay off $209 with your next payment rather than $194.

If you wait, you are paying interest on what you could have paid down in the meantime. Let's compare these two additional pay-down sequences, both adding to $5000:

$1000, $1000, $1000, $1000, $1000
$0, $0, $0, $0, $5000

The second scenario will cost you more in interest because the $1000 that could have gone in month 1 now has four more months of interest, the $1000 that could have gone in month two now has three more months of interest and so forth. So ultimately, you pay more interest by delaying your payments.
This ^^

The sooner you pay the extra $1000, the sooner you never have to pay interest on that $1000 again.

chevca
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Re: Mortgage question

Post by chevca » Wed Aug 08, 2018 9:07 am

mortfree wrote:
Tue Aug 07, 2018 5:40 pm
Would it be acceptable to put $260/month extra towards a 30-year mortgage? That’s my plan to accelerate it some.

Roth and 401k maxed.

Trying to see where BHers draw the line in an extra payment towards mortgage.

1000 per month seems high but I’ve done that before on another home.

Just curious
Yes, that would be acceptable... perfectly acceptable. It is very much a personal preference thing... there is no line. Some of us say pay ahead and others say don't.

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teen persuasion
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Re: Mortgage question

Post by teen persuasion » Wed Aug 08, 2018 9:24 am

I wrote out an amortization schedule for our high rate mortgage, to see how much effect we'd have putting infrequent large or frequent small extra principal payments. This made it clear that early payments were more powerful than waiting.

DH had received a small ($10k) inheritance, which we stuck in savings while we decided how to deploy it. Then DH was unemployed, and returned to school to switch to a new field, so as much as I wanted to put the cash on the mortgage, we kept it as cash for expenses. After we got thru that period w/o touching the $$, I felt safe putting that chunk plus a tax refund on the mortgage. That initial chunk moved our mortgage end date up 8 years!

I then earmarked each year's tax refund to mortgage prepayment, and tried to add enough to principal prepayment monthly to equal 1-3 months principal (easy in the early stages). We retired the mortgage more than 15 years early, but slowed the prepayment in the last year or 2, very little advantage then.

JoeRetire
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Re: Mortgage question

Post by JoeRetire » Wed Aug 08, 2018 3:02 pm

pezblanco wrote:
Wed Aug 08, 2018 8:32 am
JoeRetire wrote:
Tue Aug 07, 2018 4:33 pm
BogleGoggle wrote:
Tue Aug 07, 2018 12:00 pm
I have a 30 year fixed mortgage. Is it better to over the pay the mortgage every month by say $1,000 or save up larger sums of money to put in at one time? Thanks!
It's better to invest the sums of money according to your asset allocation model until you have enough to completely pay off the mortgage.

Then it's better to sit down and decide if it makes sense to pay off your mortgage (which depends on your mortgage rate, your financial goals, your lack of sleep at night, etc), or to stay invested and leveraged.
So, if your asset allocation model is 50/50 stocks and bonds .... and if bonds are returning 1 percent and your mortgage is 5 percent, you recommend investing 50% of your excess money in bonds for 30 years until you have enough saved up to completely pay off the mortgage?
Yup, except I never said you should only look at your bonds and ignore all of your other investments. That makes no sense.
Then, once you have saved enough to match whatever remains on your mortgage, sit down and think it over.

I suspect at that point many would find that the mortgage payments have become relatively insignificant, and that they would be better off financially keeping their money invested.

But if they still want to pay off the mortgage for whatever reasons, that's the right time to do it.

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pezblanco
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Re: Mortgage question

Post by pezblanco » Wed Aug 08, 2018 4:25 pm

JoeRetire wrote:
Wed Aug 08, 2018 3:02 pm
pezblanco wrote:
Wed Aug 08, 2018 8:32 am
JoeRetire wrote:
Tue Aug 07, 2018 4:33 pm
BogleGoggle wrote:
Tue Aug 07, 2018 12:00 pm
I have a 30 year fixed mortgage. Is it better to over the pay the mortgage every month by say $1,000 or save up larger sums of money to put in at one time? Thanks!
It's better to invest the sums of money according to your asset allocation model until you have enough to completely pay off the mortgage.

Then it's better to sit down and decide if it makes sense to pay off your mortgage (which depends on your mortgage rate, your financial goals, your lack of sleep at night, etc), or to stay invested and leveraged.
So, if your asset allocation model is 50/50 stocks and bonds .... and if bonds are returning 1 percent and your mortgage is 5 percent, you recommend investing 50% of your excess money in bonds for 30 years until you have enough saved up to completely pay off the mortgage?
Yup, except I never said you should only look at your bonds and ignore all of your other investments. That makes no sense.
Then, once you have saved enough to match whatever remains on your mortgage, sit down and think it over.

I suspect at that point many would find that the mortgage payments have become relatively insignificant, and that they would be better off financially keeping their money invested.

But if they still want to pay off the mortgage for whatever reasons, that's the right time to do it.
But why? Why would you buy bonds paying 1 percent while you are paying on a mortgage that is at 5% ? This makes no monetary sense.

riverguy
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Re: Mortgage question

Post by riverguy » Wed Aug 08, 2018 4:42 pm

teen persuasion wrote:
Wed Aug 08, 2018 9:24 am
I wrote out an amortization schedule for our high rate mortgage, to see how much effect we'd have putting infrequent large or frequent small extra principal payments. This made it clear that early payments were more powerful than waiting.

DH had received a small ($10k) inheritance, which we stuck in savings while we decided how to deploy it. Then DH was unemployed, and returned to school to switch to a new field, so as much as I wanted to put the cash on the mortgage, we kept it as cash for expenses. After we got thru that period w/o touching the $$, I felt safe putting that chunk plus a tax refund on the mortgage. That initial chunk moved our mortgage end date up 8 years!

I then earmarked each year's tax refund to mortgage prepayment, and tried to add enough to principal prepayment monthly to equal 1-3 months principal (easy in the early stages). We retired the mortgage more than 15 years early, but slowed the prepayment in the last year or 2, very little advantage then.
You are still paying the interest rate on the outstanding balance. The only difference is your balance is smaller at the end so the absolute value of the interest you are paying is smaller.

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dm200
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Location: Washington DC area

Re: Mortgage question

Post by dm200 » Wed Aug 08, 2018 4:56 pm

One actual or potential downside of paying extra principal on a mortgage is that this is a one way street. Once you pay down principal - you must continue the regular monthly payments for the full extent of the mortgage - or until you sell/refinance.

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teen persuasion
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Re: Mortgage question

Post by teen persuasion » Wed Aug 08, 2018 7:29 pm

riverguy wrote:
Wed Aug 08, 2018 4:42 pm
teen persuasion wrote:
Wed Aug 08, 2018 9:24 am
I wrote out an amortization schedule for our high rate mortgage, to see how much effect we'd have putting infrequent large or frequent small extra principal payments. This made it clear that early payments were more powerful than waiting.

DH had received a small ($10k) inheritance, which we stuck in savings while we decided how to deploy it. Then DH was unemployed, and returned to school to switch to a new field, so as much as I wanted to put the cash on the mortgage, we kept it as cash for expenses. After we got thru that period w/o touching the $$, I felt safe putting that chunk plus a tax refund on the mortgage. That initial chunk moved our mortgage end date up 8 years!

I then earmarked each year's tax refund to mortgage prepayment, and tried to add enough to principal prepayment monthly to equal 1-3 months principal (easy in the early stages). We retired the mortgage more than 15 years early, but slowed the prepayment in the last year or 2, very little advantage then.
You are still paying the interest rate on the outstanding balance. The only difference is your balance is smaller at the end so the absolute value of the interest you are paying is smaller.

I was looking at how much progress we could make on paying off the mortgage, that is, how fast we moved the payoff date per prepayment. The rate was 9.75%, so prepayment vs investing was pretty obvious, but I was trying to get to the point we could shift from mortgage to increased investing (beyond capturing a match). At the end, the choice was whether to put $10k in refunds to pay off the mortgage immediately, or let it ride one more year on regular payments and instead use the refunds to open Roth IRAs for both of us - begin investing one year earlier. That was also the year our oldest began college, so I wanted to hang onto the cash rather than tie it up prepaying the mortgage, at least until I saw how college expenses played out.

So at each point I was looking at the best use of the money.

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grabiner
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Re: Mortgage question

Post by grabiner » Wed Aug 08, 2018 10:38 pm

BogleGoggle wrote:
Tue Aug 07, 2018 12:00 pm
I have a 30 year fixed mortgage. Is it better to over the pay the mortgage every month by say $1,000 or save up larger sums of money to put in at one time? Thanks!
This is not a question which has a single answer; see Paying down loans versus investing on the wiki.

If you are sure that paying down the mortgage is a good idea, then you might as well make the payments as soon as you have the money, in order to get the maximum interest benefit. If you aren't sure, then you should invest the money that would be the extra payment, and then you can decide later whether it makes sense to make a larger payment against the mortgage later. (If interest rates have risen in the interim, it might be better to hold the money in a bond fund and keep the mortgage.)
Wiki David Grabiner

JoeRetire
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Re: Mortgage question

Post by JoeRetire » Thu Aug 09, 2018 3:25 pm

pezblanco wrote:
Wed Aug 08, 2018 4:25 pm
But why? Why would you buy bonds paying 1 percent while you are paying on a mortgage that is at 5% ? This makes no monetary sense.
I wouldn't buy bonds paying 1 percent. That was your proposition. I agree that it makes no sense.

Jags4186
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Re: Mortgage question

Post by Jags4186 » Thu Aug 09, 2018 4:08 pm

As most have noted there is no best answer.

Either you value liquidity or you don't
Either you save the excess money or you don't

I think most people are served best by not having a mortgage once they retire. In retirement most people want as little fixed expenses as possible and as much discretionary expense as possible. In bad times you can cut back your discretionary spend. You can never cut back your fixed expenses.

tesuzuki2002
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Re: Mortgage question

Post by tesuzuki2002 » Thu Aug 09, 2018 4:17 pm

BogleGoggle wrote:
Tue Aug 07, 2018 12:00 pm
I have a 30 year fixed mortgage. Is it better to over the pay the mortgage every month by say $1,000 or save up larger sums of money to put in at one time? Thanks!
depends on your goal! It's just math!

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