Lowering Interest?

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Shem002
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Joined: Wed Nov 07, 2018 11:49 am

Lowering Interest?

Post by Shem002 » Tue Jan 15, 2019 2:47 pm

Will contributing a large sum of money to an existing fixed rate mortgage lower the monthly interest and increase monthly principal?
Ex) 20 year refinance $110,000 at 3.99 fixed
Currently in year 3 with around $105,000 remaining balance
Monthly payment: $666 (currently $333 principal / $333 interest)

If I contributed $30,000 to the principal right now lowering the remaining balance to $75,000 would this decrease my monthly interest portion as if I were to look at the amortization schedule and see what the interest would be years down the road at $75,000 remaining balance? Or would nothing change in terms of the $333 interest monthly payment?

barnaclebob
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Re: Lowering Interest?

Post by barnaclebob » Tue Jan 15, 2019 2:52 pm

Yep, it would be just like jumping ahead in the amortization schedule by $30,000. You only pay interest on your outstanding balance. As soon as your balance drops, the interest does too.

Making a big lump sum also gives you the option to recast your payments back out to the original length of the mortgage but with lower payments. This would give you some more flexibility if cash flow becomes tight.
Last edited by barnaclebob on Tue Jan 15, 2019 2:54 pm, edited 1 time in total.

alex_686
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Re: Lowering Interest?

Post by alex_686 » Tue Jan 15, 2019 2:53 pm

First, yes, you would be lowering the amount going to interest and increasing the amount going to principle.

Second, step back and look at the big picture. You currently have a negative bond of $110,000 at 3.99 fixed. In your asset allocation, where would 30k have the biggest bang? Equities in tax deferred account? Most probably. Equities in taxable? Probably - but depends. Emergency account for additional flexibility?

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roymeo
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Re: Lowering Interest?

Post by roymeo » Tue Jan 15, 2019 2:54 pm

Yes. I've seen it in all 3 or 4 of the originator-buyers of my home loan, and our loan angents said you pretty much can't find a loan that isn't written that way anymore.
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo

02nz
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Re: Lowering Interest?

Post by 02nz » Tue Jan 15, 2019 2:54 pm

When you make a principal payment toward a fixed-rate mortgage, the amount of your monthly payments will not change, but of course with a lower principal balance accruing interest, more of that payment will go toward principal and less toward interest, and you'll end up paying off the loan sooner, with less interest paid total.

(You can also "recast" your mortgage but that involves fees. The above is the default.)

Topic Author
Shem002
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Joined: Wed Nov 07, 2018 11:49 am

Re: Lowering Interest?

Post by Shem002 » Tue Jan 15, 2019 3:03 pm

alex_686 wrote:
Tue Jan 15, 2019 2:53 pm
First, yes, you would be lowering the amount going to interest and increasing the amount going to principle.

Second, step back and look at the big picture. You currently have a negative bond of $110,000 at 3.99 fixed. In your asset allocation, where would 30k have the biggest bang? Equities in tax deferred account? Most probably. Equities in taxable? Probably - but depends. Emergency account for additional flexibility?
That is why I have been transferring my "extra mortgage payment" to an online savings account drawing 2% of actually contributing to the mortgage itself. My original thought was I could access money from the online savings account without having to take out an equity loan. But, if I look at my amortization schedule for remaining balance of $75,000 I would be contributing $81 more to principal instead of interest.

barnaclebob
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Re: Lowering Interest?

Post by barnaclebob » Tue Jan 15, 2019 3:27 pm

Shem002 wrote:
Tue Jan 15, 2019 3:03 pm
alex_686 wrote:
Tue Jan 15, 2019 2:53 pm
First, yes, you would be lowering the amount going to interest and increasing the amount going to principle.

Second, step back and look at the big picture. You currently have a negative bond of $110,000 at 3.99 fixed. In your asset allocation, where would 30k have the biggest bang? Equities in tax deferred account? Most probably. Equities in taxable? Probably - but depends. Emergency account for additional flexibility?
That is why I have been transferring my "extra mortgage payment" to an online savings account drawing 2% of actually contributing to the mortgage itself. My original thought was I could access money from the online savings account without having to take out an equity loan. But, if I look at my amortization schedule for remaining balance of $75,000 I would be contributing $81 more to principal instead of interest.
If your mortgage interest is 4% and your savings account is 2%, you are effectively paying 2% interest on that money in the savings account just to avoid a HELOC. Its the same as if you have already taken out a lower rate HELOC. Put the money into the mortgage if you don't need it for an emergency fund or other upcoming expense.

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Earl Lemongrab
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Re: Lowering Interest?

Post by Earl Lemongrab » Tue Jan 15, 2019 6:43 pm

Keeping a lot of cash isn't that great, but paying down a mortgage is not the only thing to do with it. I'd look hard at investing that money.

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