Paying "early" on mortgage may be unwise

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dm200
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Paying "early" on mortgage may be unwise

Post by dm200 » Thu Mar 28, 2019 9:40 am

Perhaps this (and related) information might be added to the Wiki - with any corrections/modifications suggested/added.

Today, almost all consumer (not real estate) loans charge/calculate interest on the outstanding balance of the loan - either when the payment is made or added on a monthly basis. Therefore, if you make a regular payment early (before the due date), you will pay less interest over the life of the loan. Similarly, if you pay extra with the regular payment, the principal balance goes down by that extra amount - resulting in lower interest over the life of the loan. Normally, then, for such loans - to make extra principal payments - you just pay more and it is not necessary to specify the extra as principal.

Depending on the lender, you may need to make a full regular payment in succeeding months even if you make a bigger payment. Some lenders (such as some credit unions) though may allow you to pay less in the succeeding month.

Lenders for such loans do this because of more stringent laws and regulations in recent decades, as well as the fact that increased computerization facilitates the practice. Different lenders may do the interest calculations with some slight differences in detail.

Almost all home mortgages (first), however, are very different. Typically, no matter when you make the monthly payment (as long as it is not late), you are charged the regular interest for that payment. You save nothing by paying early.

If you want to pay extra principal on the mortgage (to reduce interest paid), you must specifically identify such extra to the lender so that the principal is reduced. if/when you do this - you will still be fully obligated to make all monthly mortgage payments on the regular schedule.

I think (not 100% sure) Home equity loans (with regular fixed term) and second trust loans are usually like the consumer loans -- BUT check with lender for details.

Why this difference for mortgages?? My "guess" is that most mortgages are "sold" after being funded and this method of interest collection is an established standard for different lenders and purchasers. It makes such sales more attractive because more interest is collected, normally, than on a similar consumer loan.

While there are valid reasons to pay down or pay off your mortgage early, there are valid reasons to just pay the required monthly payment "on time" and not early. Such mortgage loans are usually the lowest interest rates of any kind of loan folks normally get.

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Re: Paying "early" on mortgage may be unwise

Post by RL1013 » Thu Mar 28, 2019 9:50 am

There are different kind of folks with different mindsets. There is no one size fits all. Absolute math may seem to win considering current situation as we see it. But there are folks for whom the mortgage takes up a huge amount of thinking space. Paying off means freedom for them. You or me cannot put a value on that feeling of being free with any math. Their mind works and sees things in a better way. To argue that one way is superior to another is futile unless you first specify what you are trying to maximize. To each his own.

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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 9:51 am

This doesn't seem like an argument against paying off your mortgage early at all. Rather, it seems like a statement that those who choose to do so should clearly specify to their lender that the additional payment is for "principal only."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying "early" on mortgage may be unwise

Post by dm200 » Thu Mar 28, 2019 9:53 am

willthrill81 wrote:
Thu Mar 28, 2019 9:51 am
This doesn't seem like an argument against paying off your mortgage early at all. Rather, it seems like a statement that those who choose to do so should clearly specify to their lender that the additional payment is for "principal only."
Yes - I think many folks wrongly believe that making the regular payment early on their mortgage saves on interest - when it does not at all.

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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 9:58 am

dm200 wrote:
Thu Mar 28, 2019 9:53 am
willthrill81 wrote:
Thu Mar 28, 2019 9:51 am
This doesn't seem like an argument against paying off your mortgage early at all. Rather, it seems like a statement that those who choose to do so should clearly specify to their lender that the additional payment is for "principal only."
Yes - I think many folks wrongly believe that making the regular payment early on their mortgage saves on interest - when it does not at all.
Indeed. You can make regular payments months or even years in advance, but doing so will not shorten the duration of the mortgage at all. It's an interesting quirk, but everyone I know who's sought to pay off their mortgage early has been aware that "principal only" should be specified. Also, it's a good idea to make sure that the principal payment is posted by your lender as such.

I once worked for the mortgage arm of a regional branch, and if someone was making a principal payment in the amount of their regular mortgage payment or slightly more, the computer would often automatically treat it or the bulk of it as a regular payment and not a principal payment. Some people want to make regular payments in advance so that if something happens to their income, their mortgage will already be 'paid up' for a while.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying "early" on mortgage may be unwise

Post by barnaclebob » Thu Mar 28, 2019 10:02 am

dm200 wrote:
Thu Mar 28, 2019 9:40 am
...you will still be fully obligated to make all monthly mortgage payments on the regular schedule. ...
Don't forget that recasting is an option for many loans if you get ahead of the amortization schedule and need to lower your required payment.

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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 10:02 am

My lender always assumed any additional amount included in a monthly payment above the amount due was to be applied to be principal but any individual check was to be applied to the next loan payment that was due. So if my mortgage payment was $2,000 and I sent them a check for $3,000 I would have made my payment and had an $1,000 applied to principal. Where as if I sent them a check for $2,000 then a check for $1,000 I had paid this month's payment and owed only $1,000 for next month's payment. Also, are you sure that you don't receive a refund for any overpayment of interest at the end if the loan is paid off early?
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Re: Paying "early" on mortgage may be unwise

Post by Quickfoot » Thu Mar 28, 2019 10:06 am

I agree this isn't a strong argument for not paying off early HOWEVER it is unwise to do so but for a different reason. With historically low interest rates the majority of mortgage holders are going to be better off investing the money in the market than paying down the mortgage. There is a huge cultural preference (especially among older generations) for paying down a mortgage but from a financial perspective it doesn't currently make sense.

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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 10:07 am

TheTimeLord wrote:
Thu Mar 28, 2019 10:02 am
Also, are you sure that you don't receive a refund for any overpayment of interest at the end if the loan is paid off early?
Yes, you would receive a refund of of any overpayment. But if you paid for the next month's regular mortgage payment a month, year, etc. in advance, that doesn't save you a cent of interest. Only additional principal payments can do that.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 10:07 am

dm200 wrote:
Thu Mar 28, 2019 9:53 am
willthrill81 wrote:
Thu Mar 28, 2019 9:51 am
This doesn't seem like an argument against paying off your mortgage early at all. Rather, it seems like a statement that those who choose to do so should clearly specify to their lender that the additional payment is for "principal only."
Yes - I think many folks wrongly believe that making the regular payment early on their mortgage saves on interest - when it does not at all.
I don't think making your regular payment on you car early saves you on it either? I maybe confused but I think make payments early only reduces interest owed on revolving credit such as credit cards.
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 10:10 am

Quickfoot wrote:
Thu Mar 28, 2019 10:06 am
I agree this isn't a strong argument for not paying off early HOWEVER it is unwise to do so but for a different reason. With historically low interest rates the majority of mortgage holders are going to be better off investing the money in the market than paying down the mortgage. There is a huge cultural preference (especially among older generations) for paying down a mortgage but from a financial perspective it doesn't currently make sense.
You're arguing that a mortgage at today's rates represents a form of inexpensive and secure leverage. You might be right, but there are still risks involved with such a strategy. Ask one of the millions who lost their home a decade ago about that. These risks can be mitigated against, but the typical mortgage holder is not prepared for six months of unemployment, for instance.

Mortgagees in the year 2000 would generally have done a lot better to have paid down their mortgage early rather than investing it in stocks, even through today.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 10:10 am

TheTimeLord wrote:
Thu Mar 28, 2019 10:07 am
dm200 wrote:
Thu Mar 28, 2019 9:53 am
willthrill81 wrote:
Thu Mar 28, 2019 9:51 am
This doesn't seem like an argument against paying off your mortgage early at all. Rather, it seems like a statement that those who choose to do so should clearly specify to their lender that the additional payment is for "principal only."
Yes - I think many folks wrongly believe that making the regular payment early on their mortgage saves on interest - when it does not at all.
I don't think making your regular payment on you car early saves you on it either? I maybe confused but I think make payments early only reduces interest owed on revolving credit such as credit cards.
Yes, you're correct.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying "early" on mortgage may be unwise

Post by Quickfoot » Thu Mar 28, 2019 10:11 am

Most people also don't understand the TIL statement on the mortgage isn't nearly as bad as it looks, you automatically save interest by discounting. $1 of interest is only about $0.70 10 years into your mortgage and $0.64 15 years in. Given discounting and the historically low return on real estate with the very low interest rates available today people are far better off investing than paying down mortgage debt. Thanks to inflation you are effectively only going to pay about half the interest anyway.

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Re: Paying "early" on mortgage may be unwise

Post by dm200 » Thu Mar 28, 2019 10:12 am

Quickfoot wrote:
Thu Mar 28, 2019 10:11 am
Most people also don't understand the TIL statement on the mortgage isn't nearly as bad as it looks, you automatically save interest by discounting. $1 of interest is only about $0.70 10 years into your mortgage and $0.64 15 years in. Given discounting and the historically low return on real estate with the very low interest rates available today people are far better off investing than paying down mortgage debt.
Yes, I agree.

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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 10:12 am

willthrill81 wrote:
Thu Mar 28, 2019 10:07 am
TheTimeLord wrote:
Thu Mar 28, 2019 10:02 am
Also, are you sure that you don't receive a refund for any overpayment of interest at the end if the loan is paid off early?
Yes, you would receive a refund of of any overpayment. But if you paid for the next month's regular mortgage payment a month, year, etc. in advance, that doesn't save you a cent of interest. Only additional principal payments can do that.
I don't believe that is actually correct. If I have a 30 year loan I have 360 payments. If I make all 360 payments in 15 years I have paid interest an extra 15 years interest. Are you sure that isn't refunded?
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 10:14 am

TheTimeLord wrote:
Thu Mar 28, 2019 10:12 am
willthrill81 wrote:
Thu Mar 28, 2019 10:07 am
TheTimeLord wrote:
Thu Mar 28, 2019 10:02 am
Also, are you sure that you don't receive a refund for any overpayment of interest at the end if the loan is paid off early?
Yes, you would receive a refund of of any overpayment. But if you paid for the next month's regular mortgage payment a month, year, etc. in advance, that doesn't save you a cent of interest. Only additional principal payments can do that.
I don't believe that is actually correct. If I have a 30 year loan I have 360 payments. If I make all 360 payments in 15 years I have paid interest an extra 15 years interest. Are you sure that isn't refunded?
Positive. Someone can make any regular mortgage payment days, months, or years in advance, but if it isn't specified as a principal payment, it doesn't save the mortgage holder a cent, ever.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying "early" on mortgage may be unwise

Post by acegolfer » Thu Mar 28, 2019 10:15 am

The subject is misleading. And this part in OP should be highlighted.

If you want to pay extra principal on the mortgage (to reduce interest paid), you must specifically identify such extra to the lender so that the principal is reduced.

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Re: Paying "early" on mortgage may be unwise

Post by Quickfoot » Thu Mar 28, 2019 10:17 am

Yep there is a difference between making an advance payment and making a principal payment. Most lenders let you specify if the payment should be a principal payment or an early payment. Making advance payments can be a good idea for people that are bad at saving, it's basically pre-paying your emergency fund so if something happens you don't have to make a payment for say 6 months but it wont save you interest.

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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 10:17 am

Quickfoot wrote:
Thu Mar 28, 2019 10:11 am
Most people also don't understand the TIL statement on the mortgage isn't nearly as bad as it looks, you automatically save interest by discounting. $1 of interest is only about $0.70 10 years into your mortgage and $0.64 15 years in. Given discounting and the historically low return on real estate with the very low interest rates available today people are far better off investing than paying down mortgage debt. Thanks to inflation you are effectively only going to pay about half the interest anyway.
So by that logic alone, were you avoiding most forms of fixed income investing a few years ago, when the real return was negative?

You state that people "are better off investing that paying down mortgage debt," but this can only be known in hindsight.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 10:21 am

willthrill81 wrote:
Thu Mar 28, 2019 10:14 am
TheTimeLord wrote:
Thu Mar 28, 2019 10:12 am
willthrill81 wrote:
Thu Mar 28, 2019 10:07 am
TheTimeLord wrote:
Thu Mar 28, 2019 10:02 am
Also, are you sure that you don't receive a refund for any overpayment of interest at the end if the loan is paid off early?
Yes, you would receive a refund of of any overpayment. But if you paid for the next month's regular mortgage payment a month, year, etc. in advance, that doesn't save you a cent of interest. Only additional principal payments can do that.
I don't believe that is actually correct. If I have a 30 year loan I have 360 payments. If I make all 360 payments in 15 years I have paid interest an extra 15 years interest. Are you sure that isn't refunded?
Positive. Someone can make any regular mortgage payment days, months, or years in advance, but if it isn't specified as a principal payment, it doesn't save the mortgage holder a cent, ever.
So you are saying even though the mortgage was paid off on 15 years the mortgage company gets to keep all 30 years of interest. I understand why people believe this because of how the payment is handled but I also remember getting interest refunded when I paid my mortgage off which makes me question it.
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Re: Paying "early" on mortgage may be unwise

Post by Dottie57 » Thu Mar 28, 2019 10:22 am

acegolfer wrote:
Thu Mar 28, 2019 10:15 am
The subject is misleading. And this part in OP should be highlighted.

If you want to pay extra principal on the mortgage (to reduce interest paid), you must specifically identify such extra to the lender so that the principal is reduced.
Banks have become greedier. I paid off my mortgage early - 2004. The extra in the payment automatically went to principal. It wasn’t applied to the next payment + interest.

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Re: Paying "early" on mortgage may be unwise

Post by LiterallyIronic » Thu Mar 28, 2019 10:25 am

dm200 wrote:
Thu Mar 28, 2019 9:40 am
If you want to pay extra principal on the mortgage (to reduce interest paid), you must specifically identify such extra to the lender so that the principal is reduced. if/when you do this - you will still be fully obligated to make all monthly mortgage payments on the regular schedule.
Yep. This is why I pay extra principal every month, but I make the actual payment as late as possible. I pay the mortgage on the last Friday of the month. The "regular payment" isn't early for no reason, but the accompanying extra principal payment saves me the interest.

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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 10:27 am

Dottie57 wrote:
Thu Mar 28, 2019 10:22 am
acegolfer wrote:
Thu Mar 28, 2019 10:15 am
The subject is misleading. And this part in OP should be highlighted.

If you want to pay extra principal on the mortgage (to reduce interest paid), you must specifically identify such extra to the lender so that the principal is reduced.
Banks have become greedier. I paid off my mortgage early - 2004. The extra in the payment automatically went to principal. It wasn’t applied to the next payment + interest.
I am thinking it is only if you make a separate extra payment instead of including extra in a regular payment that there is an issue with the characterization of the funds. My experience is the same as yours and my mortgage was paid off years later.
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 10:28 am

TheTimeLord wrote:
Thu Mar 28, 2019 10:21 am
willthrill81 wrote:
Thu Mar 28, 2019 10:14 am
TheTimeLord wrote:
Thu Mar 28, 2019 10:12 am
willthrill81 wrote:
Thu Mar 28, 2019 10:07 am
TheTimeLord wrote:
Thu Mar 28, 2019 10:02 am
Also, are you sure that you don't receive a refund for any overpayment of interest at the end if the loan is paid off early?
Yes, you would receive a refund of of any overpayment. But if you paid for the next month's regular mortgage payment a month, year, etc. in advance, that doesn't save you a cent of interest. Only additional principal payments can do that.
I don't believe that is actually correct. If I have a 30 year loan I have 360 payments. If I make all 360 payments in 15 years I have paid interest an extra 15 years interest. Are you sure that isn't refunded?
Positive. Someone can make any regular mortgage payment days, months, or years in advance, but if it isn't specified as a principal payment, it doesn't save the mortgage holder a cent, ever.
So you are saying even though the mortgage was paid off on 15 years the mortgage company gets to keep all 30 years of interest. I understand why people believe this because of how the payment is handled but I also remember getting interest refunded when I paid my mortgage off which makes me question it.
Refunds at the end of a mortgage are virtually always due to the amount the bank received for the payoff being slightly higher than the actual amount needed to do so. I've seen thousands of mortgages, but never once did I see a mortgage holder receive a refund for 'back interest' from months or years prior.
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Re: Paying "early" on mortgage may be unwise

Post by Quickfoot » Thu Mar 28, 2019 10:28 am

When you pay off a mortgage you are making a principal payment, it isn't the same thing as making all the remaining scheduled payments in advance. When you make an extra payment lenders ask if it should be a pre-payment or a principal reduction.

Here are the two scenarios, say two people take out a 30 year mortgage and both want to pay off their mortgage in only 15 years.

Person A: Makes two regular payments per month for 15 years, this doesn't actually save interest because what's really happened is they still have a 30 year mortgage they just don't have to make a payment for the last 15 years because they've made those payments in advance. If they were unable to make a payment they'd be OK because they are ahead of schedule on their payments.

Person B: Makes one regular payment and one principal payment per month, this person saves interest because they are paying down principal faster than scheduled. However if this person wasn't able to make a payment they would NOT be OK because they haven't prepaid any payments. Because they have a lower principal more of their regular payment goes to paying down principal and they wind up paying less interest.
Last edited by Quickfoot on Thu Mar 28, 2019 10:31 am, edited 1 time in total.

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Re: Paying "early" on mortgage may be unwise

Post by stoptothink » Thu Mar 28, 2019 10:30 am

Dottie57 wrote:
Thu Mar 28, 2019 10:22 am
acegolfer wrote:
Thu Mar 28, 2019 10:15 am
The subject is misleading. And this part in OP should be highlighted.

If you want to pay extra principal on the mortgage (to reduce interest paid), you must specifically identify such extra to the lender so that the principal is reduced.
Banks have become greedier. I paid off my mortgage early - 2004. The extra in the payment automatically went to principal. It wasn’t applied to the next payment + interest.
My lender makes it really easy, when I schedule the payment it has an extra line: "extra principle". Pretty hard to screw it up. 3yrs into a 15yr at 3.125%, on track to have it paid off in 6yrs. After maxing out 2 401ks, 2 Roths, family HSA, and state max on my kids' 529s, everything else goes into extra principle. Might not be the ideal way to maximize wealth, but it is simple and we save plenty for retirement, I don't want to mess with taxable accounts until we are totally debt-free.

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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 10:33 am

Quickfoot wrote:
Thu Mar 28, 2019 10:28 am
When you pay off a mortgage you are making a principal payment, it isn't the same thing as making the remaining scheduled payments in advance. When you make an extra payment lenders ask if it should be a pre-payment or a principal reduction.

Here are the two scenarios, say two people take out a 30 year mortgage and both want to pay off their mortgage in only 15 years.

Person A: Makes two regular payments per month for 15 years, this doesn't actually save interest because what's really happened is they still have a 30 year mortgage they just don't have to make a payment for the last 15 years because they've made those payments in advance. If they were unable to make a payment they'd be OK because they are ahead of schedule on their payments.

Person B: Makes one regular payment and one principal payment per month, this person saves interest because they are also paying down principal. However if this person wasn't able to make a payment they would NOT be OK because they haven't prepaid any payments. Because they have a lower principal more of their regular payment goes to paying down principal and they wind up paying less interest.
First, let me say Person B is doing it the correct way. But for Person A I get this is he made 29 years and 11 months of payments then waited to the end of the term to make the last payment he would receive nothing, but just not sure if he made the final payment after 15 years because at that point he is no longer ahead on his payments but the loan is actually paid off.
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Re: Paying "early" on mortgage may be unwise

Post by rkhusky » Thu Mar 28, 2019 10:39 am

By not adjusting for the day of the month that your mortgage payment is received, the lender can tell you to the penny how much interest you will pay over the life of the loan if all payments are made on time.

The same is not true for car loans or HEL.

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Re: Paying "early" on mortgage may be unwise

Post by Independent George » Thu Mar 28, 2019 10:42 am

stoptothink wrote:
Thu Mar 28, 2019 10:30 am
My lender makes it really easy, when I schedule the payment it has an extra line: "extra principle". Pretty hard to screw it up.
Yeah, this really confused me regarding the OP. My mortgage has been bought and sold four times, and I refinanced once; under each lender, there has always been a checkbox on their payment form to make additional payments into principal or escrow. This seems to be the industry standard - it really doesn't seem that hard to understand.

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Re: Paying "early" on mortgage may be unwise

Post by acegolfer » Thu Mar 28, 2019 10:46 am

stoptothink wrote:
Thu Mar 28, 2019 10:30 am
Dottie57 wrote:
Thu Mar 28, 2019 10:22 am
acegolfer wrote:
Thu Mar 28, 2019 10:15 am
The subject is misleading. And this part in OP should be highlighted.

If you want to pay extra principal on the mortgage (to reduce interest paid), you must specifically identify such extra to the lender so that the principal is reduced.
Banks have become greedier. I paid off my mortgage early - 2004. The extra in the payment automatically went to principal. It wasn’t applied to the next payment + interest.
My lender makes it really easy, when I schedule the payment it has an extra line: "extra principle". Pretty hard to screw it up. 3yrs into a 15yr at 3.125%, on track to have it paid off in 6yrs. After maxing out 2 401ks, 2 Roths, family HSA, and state max on my kids' 529s, everything else goes into extra principle. Might not be the ideal way to maximize wealth, but it is simple and we save plenty for retirement, I don't want to mess with taxable accounts until we are totally debt-free.
Yeah, I think OP's case applies to ppl who mail checks to pay mortgage ptm. If mtg pmt is $1k and if one sends another $1k check, the bank will
naturally think this $1k check is the mtg pmt for the next month not for extra principal.

If one uses online banking instead, it's likely to have a line for "extra principal". As in your case, it's pretty hard to screw up.

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Re: Paying "early" on mortgage may be unwise

Post by vineviz » Thu Mar 28, 2019 10:48 am

TheTimeLord wrote:
Thu Mar 28, 2019 10:21 am
So you are saying even though the mortgage was paid off on 15 years the mortgage company gets to keep all 30 years of interest. I understand why people believe this because of how the payment is handled but I also remember getting interest refunded when I paid my mortgage off which makes me question it.
There are two different scenarios running around here, I think.

Making your mortgage payments early isn't the same thing as paying off your mortgage early.

Let's say you have a mortgage with an outstanding principal balance of $100,000 and a monthly payment of $800.

If you send the mortgage company a check for $100,000 and specify it as "principal only" then the mortgage is paid off early. They don't get any more interest.

If instead you send the mortgage company a check for $100,000 and don't specify it as "principal only" then they can (and likely will) consider it as covering the next 125 regular payments. You won't have any payments due until September, 2020 (because you made your payments early) but the $100,000 in principal is still accumulating interest like normal. When you resume payments, they will still be $800/month for another 52 months or so.

The first option is probably WAY better for you than the second option, which is why you need to make sure that you are specifying any additional payments as "principal only". If you let the mortgage company treat the extra payments as early payments instead of additional payments, you are basically just loaning them money interest-free while they continue to charge you interest on the mortgage.
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Re: Paying "early" on mortgage may be unwise

Post by Vulcan » Thu Mar 28, 2019 10:49 am

Quickfoot wrote:
Thu Mar 28, 2019 10:06 am
I agree this isn't a strong argument for not paying off early HOWEVER it is unwise to do so but for a different reason. With historically low interest rates the majority of mortgage holders are going to be better off investing the money in the market than paying down the mortgage. There is a huge cultural preference (especially among older generations) for paying down a mortgage but from a financial perspective it doesn't currently make sense.
We paid off as part of pre-college financial planning.
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Re: Paying "early" on mortgage may be unwise

Post by LongRoad » Thu Mar 28, 2019 10:50 am

Quickfoot wrote:
Thu Mar 28, 2019 10:11 am
Most people also don't understand the TIL statement on the mortgage isn't nearly as bad as it looks, you automatically save interest by discounting. $1 of interest is only about $0.70 10 years into your mortgage and $0.64 15 years in. Given discounting and the historically low return on real estate with the very low interest rates available today people are far better off investing than paying down mortgage debt. Thanks to inflation you are effectively only going to pay about half the interest anyway.
From an investment POV, your mortgage is a negative bond. This is the case completely independent of the growth rate in value of your home. If your personal target asset allocation is >100% stocks (mine isn't), then you might decide to carry the largest mortgage you can qualify for, refinance to a cash-out mortgage when your LTV hits 60%, invest the proceeds in stocks, and carry on. It could turn out very well.

For the large number with essentially non-deductible mortgages, it makes little financial sense to carry a mortgage at 3.5-4.0% while simultaneously holding fixed-income (outside of the EF) with an expected return of, say, 2.5-3.0% nominal, regardless of the asset location. If you aren't exploiting the leverage of your mortgage to go 100% stocks in your portfolio, the risk-free after tax return equal to your mortgage interest rate is a worthwhile investment to consider.

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Re: Paying "early" on mortgage may be unwise

Post by LiterallyIronic » Thu Mar 28, 2019 10:55 am

acegolfer wrote:
Thu Mar 28, 2019 10:46 am
stoptothink wrote:
Thu Mar 28, 2019 10:30 am
Dottie57 wrote:
Thu Mar 28, 2019 10:22 am
acegolfer wrote:
Thu Mar 28, 2019 10:15 am
The subject is misleading. And this part in OP should be highlighted.

If you want to pay extra principal on the mortgage (to reduce interest paid), you must specifically identify such extra to the lender so that the principal is reduced.
Banks have become greedier. I paid off my mortgage early - 2004. The extra in the payment automatically went to principal. It wasn’t applied to the next payment + interest.
My lender makes it really easy, when I schedule the payment it has an extra line: "extra principle". Pretty hard to screw it up. 3yrs into a 15yr at 3.125%, on track to have it paid off in 6yrs. After maxing out 2 401ks, 2 Roths, family HSA, and state max on my kids' 529s, everything else goes into extra principle. Might not be the ideal way to maximize wealth, but it is simple and we save plenty for retirement, I don't want to mess with taxable accounts until we are totally debt-free.
Yeah, I think OP's case applies to ppl who mail checks to pay mortgage ptm. If mtg pmt is $1k and if one sends another $1k check, the bank will
naturally think this $1k check is the mtg pmt for the next month not for extra principal.

If one uses online banking instead, it's likely to have a line for "extra principal". As in your case, it's pretty hard to screw up.
It's also pretty hard to screw up when you pay in person like I do. "I'd like to pay my mortgage, and an extra $200 to principal." If you don't specify the purpose of the extra, the teller will ask. I don't think the bank is trying to rip someone off.

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Re: Paying "early" on mortgage may be unwise

Post by rkhusky » Thu Mar 28, 2019 10:55 am

I prefer the liquidity of having bonds, even if they pay less. I view it like insurance. Plus I can’t rebalance with my mortgage.

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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 11:00 am

TheTimeLord wrote:
Thu Mar 28, 2019 10:33 am
Quickfoot wrote:
Thu Mar 28, 2019 10:28 am
When you pay off a mortgage you are making a principal payment, it isn't the same thing as making the remaining scheduled payments in advance. When you make an extra payment lenders ask if it should be a pre-payment or a principal reduction.

Here are the two scenarios, say two people take out a 30 year mortgage and both want to pay off their mortgage in only 15 years.

Person A: Makes two regular payments per month for 15 years, this doesn't actually save interest because what's really happened is they still have a 30 year mortgage they just don't have to make a payment for the last 15 years because they've made those payments in advance. If they were unable to make a payment they'd be OK because they are ahead of schedule on their payments.

Person B: Makes one regular payment and one principal payment per month, this person saves interest because they are also paying down principal. However if this person wasn't able to make a payment they would NOT be OK because they haven't prepaid any payments. Because they have a lower principal more of their regular payment goes to paying down principal and they wind up paying less interest.
First, let me say Person B is doing it the correct way. But for Person A I get this is he made 29 years and 11 months of payments then waited to the end of the term to make the last payment he would receive nothing, but just not sure if he made the final payment after 15 years because at that point he is no longer ahead on his payments but the loan is actually paid off.
At the end of 15 years, person B would indeed have paid off the mortgage but would also have paid interest on the last 15 years of the mortgage in advance.

I'm not saying that it should be that way, but that's the way it is. It's 'principal payments' or bust.
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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 11:01 am

vineviz wrote:
Thu Mar 28, 2019 10:48 am
TheTimeLord wrote:
Thu Mar 28, 2019 10:21 am
So you are saying even though the mortgage was paid off on 15 years the mortgage company gets to keep all 30 years of interest. I understand why people believe this because of how the payment is handled but I also remember getting interest refunded when I paid my mortgage off which makes me question it.
There are two different scenarios running around here, I think.

Making your mortgage payments early isn't the same thing as paying off your mortgage early.

Let's say you have a mortgage with an outstanding principal balance of $100,000 and a monthly payment of $800.

If you send the mortgage company a check for $100,000 and specify it as "principal only" then the mortgage is paid off early. They don't get any more interest.

If instead you send the mortgage company a check for $100,000 and don't specify it as "principal only" then they can (and likely will) consider it as covering the next 125 regular payments. You won't have any payments due until September, 2020 (because you made your payments early) but the $100,000 in principal is still accumulating interest like normal. When you resume payments, they will still be $800/month for another 52 months or so.

The first option is probably WAY better for you than the second option, which is why you need to make sure that you are specifying any additional payments as "principal only". If you let the mortgage company treat the extra payments as early payments instead of additional payments, you are basically just loaning them money interest-free while they continue to charge you interest on the mortgage.
And I may be a 100% wrong but for some reason I think there would be an adjustment at payoff for overpaid interest if the person paid his loan off by making all the payments just in a compressed timeframe. But we agree on the best way to do this.
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 11:04 am

rkhusky wrote:
Thu Mar 28, 2019 10:55 am
I prefer the liquidity of having bonds, even if they pay less. I view it like insurance. Plus I can’t rebalance with my mortgage.
And that's what much of the 'invest or pay down debt' argument comes down to: personal preference. I've heard of folks who felt uneasy if they didn't have $100k in their checking account. We're on the other end of the spectrum and run our checking account very lean because we simply don't have much need and no desire for that type of liquidity. And there are folks everywhere in between.
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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 11:07 am

willthrill81 wrote:
Thu Mar 28, 2019 11:00 am
TheTimeLord wrote:
Thu Mar 28, 2019 10:33 am
Quickfoot wrote:
Thu Mar 28, 2019 10:28 am
When you pay off a mortgage you are making a principal payment, it isn't the same thing as making the remaining scheduled payments in advance. When you make an extra payment lenders ask if it should be a pre-payment or a principal reduction.

Here are the two scenarios, say two people take out a 30 year mortgage and both want to pay off their mortgage in only 15 years.

Person A: Makes two regular payments per month for 15 years, this doesn't actually save interest because what's really happened is they still have a 30 year mortgage they just don't have to make a payment for the last 15 years because they've made those payments in advance. If they were unable to make a payment they'd be OK because they are ahead of schedule on their payments.

Person B: Makes one regular payment and one principal payment per month, this person saves interest because they are also paying down principal. However if this person wasn't able to make a payment they would NOT be OK because they haven't prepaid any payments. Because they have a lower principal more of their regular payment goes to paying down principal and they wind up paying less interest.
First, let me say Person B is doing it the correct way. But for Person A I get this is he made 29 years and 11 months of payments then waited to the end of the term to make the last payment he would receive nothing, but just not sure if he made the final payment after 15 years because at that point he is no longer ahead on his payments but the loan is actually paid off.
At the end of 15 years, person B would indeed have paid off the mortgage but would also have paid interest on the last 15 years of the mortgage in advance.

I'm not saying that it should be that way, but that's the way it is. It's 'principal payments' or bust.
And I may be totally 100% incorrect but I am not sure the bank would be allowed to keep the interest for the last 15 years of the loan since loan balance is $0 and they would not have been financing a thing. The difference I see is you can no longer assume these are future payments since the principal is paid off whereas before these where payments that were made early that is no longer the case since there would no longer be payments owed for the next 15 years.
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Re: Paying "early" on mortgage may be unwise

Post by 28fe6 » Thu Mar 28, 2019 11:07 am

For the large number with essentially non-deductible mortgages, it makes little financial sense to carry a mortgage at 3.5-4.0% while simultaneously holding fixed-income (outside of the EF) with an expected return of, say, 2.5-3.0% nominal, regardless of the asset location
This logic is compelling, but the "majority" do not max out their tax-advantaged investment options. What if those 2.5-3.0% bonds are being invested in a 401k that represents deferral of say 22% taxes?

Sure the 4% number is higher than the 2.5% number, but taxes dominate. Which is better, pay 22% taxes on your money, then "invest" the remaining 78% towards the 4% mortgage? Or defer the 22% taxes, and buy the 2.5-3.0% bonds with the whole amount?

I stopped paying extra on my mortgage when I realized I was forfeiting tax deferral on the order of 25% to save interest on the order or 3%. Of course, it would be great if I could afford to max out my 401k, HSA, IRA, and STILL pay extra on the mortgage.

I agree it's silly on the face of it to pay 4% on a loan while loaning out money at 2.5%, but taxes make doing silly things advantageous.
Last edited by 28fe6 on Thu Mar 28, 2019 11:08 am, edited 1 time in total.

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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 11:08 am

TheTimeLord wrote:
Thu Mar 28, 2019 11:01 am
And I may be a 100% wrong but for some reason I think there would be an adjustment at payoff for overpaid interest if the person paid his loan off by making all the payments just in a compressed timeframe. But we agree on the best way to do this.
You can see this for yourself if you still have a mortgage. Make a regular payment a month in advance and see if, based on the interest you pay that month, it moves you up in the amortization schedule (i.e. from month 82 to month 84).

From the bank's perspective, a 30 year mortgage has 360 required payments. You can make those payments (not principal payments) in advance if you wish, but they still have to be made. Paying them early does not reduce the total number of needed payments, even if you make the last payment 29 years in advance. Now could you persuade your mortgage lender in an extreme instance to retroactively re-post some of those regular payments as principal only? Possibly, but probably not years after the fact.
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Re: Paying "early" on mortgage may be unwise

Post by Mr.BB » Thu Mar 28, 2019 11:12 am

When I used to pay an extra mortgage payment or two a year I always put on the check and the corresponding letter that the payment went the principal. One time they screwed up and they had to go back and fix it.
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Re: Paying "early" on mortgage may be unwise

Post by TheTimeLord » Thu Mar 28, 2019 11:13 am

willthrill81 wrote:
Thu Mar 28, 2019 11:08 am
TheTimeLord wrote:
Thu Mar 28, 2019 11:01 am
And I may be a 100% wrong but for some reason I think there would be an adjustment at payoff for overpaid interest if the person paid his loan off by making all the payments just in a compressed timeframe. But we agree on the best way to do this.
You can see this for yourself if you still have a mortgage. Make a regular payment a month in advance and see if, based on the interest you pay that month, it moves you up in the amortization schedule (i.e. from month 82 to month 84).
You are not hearing my point. I know if doesn't because there is an assumption I am making an early payment that is due in the future so they are applying against it. If you do this enough to actually pay off the loan, i.e. 360 payments in 15 years, they no longer have those future payments to assume to apply to because there is no balance thus there would be no interest owed. It only matters at payoff until then it is just an early payment.

How can I prepay a July 2020 payment if I don't owe a July 2020 payment and if I don't owe that payment how can I be charged interest for a non-existing payment.
Last edited by TheTimeLord on Thu Mar 28, 2019 11:15 am, edited 1 time in total.
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Re: Paying "early" on mortgage may be unwise

Post by Oddball » Thu Mar 28, 2019 11:14 am

Is there a easy way to find out if extra paid on past payments when to principal or not? Plug in numbers to an online calculator and see where the principal would be at?

We have 2 mortgages, 1 condo mortgage which is currently a rental. DW bought the condo and lived there for years before we met and she use to pay extra every month (say the mortgage was $900, and she would pay $1000 each month instead). We use to do the same with our current place, pay a little extra each month. All of our payments have been electronic, just pulled from our checking accounts.

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Re: Paying "early" on mortgage may be unwise

Post by Quickfoot » Thu Mar 28, 2019 11:18 am

28fe6 wrote:
Thu Mar 28, 2019 11:07 am
I agree it's silly on the face of it to pay 4% on a loan while loaning out money at 2.5%, but taxes make doing silly things advantageous.
From a pure return perspective it might be silly but from a strategic perspective it isn't. The purpose of fixed income isn't really to earn a return, that's what equities are for. Fixed income stabilizes the portfolio value so it can achieve the desired result which might be locking in enough value to retire or providing funds in an emergency during an economic downturn. Fixed income isn't an investment, it is insurance and like all insurance it comes with a cost.

In the event of an economic downturn having 200K extra equity in your house isn't likely to help you survive, the value of the house is likely to drop as well market demand. On the other hand having much more liquid investments with the same money could make all the difference in the world.

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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 » Thu Mar 28, 2019 11:23 am

TheTimeLord wrote:
Thu Mar 28, 2019 11:13 am
willthrill81 wrote:
Thu Mar 28, 2019 11:08 am
TheTimeLord wrote:
Thu Mar 28, 2019 11:01 am
And I may be a 100% wrong but for some reason I think there would be an adjustment at payoff for overpaid interest if the person paid his loan off by making all the payments just in a compressed timeframe. But we agree on the best way to do this.
You can see this for yourself if you still have a mortgage. Make a regular payment a month in advance and see if, based on the interest you pay that month, it moves you up in the amortization schedule (i.e. from month 82 to month 84).
You are not hearing my point. I know if doesn't because there is an assumption I am making an early payment that is due in the future so they are applying against it. If you do this enough to actually pay off the loan, i.e. 360 payments in 15 years, they no longer have those future payments to assume to apply to because there is no balance thus there would be no interest owed. It only matters at payoff until then it is just an early payment.

How can I prepay a July 2020 payment if I don't owe a July 2020 payment and if I don't owe that payment how can I be charged interest for a non-existing payment.
If what you were saying was true, then if a borrower made just one regular payment in advance, and then later paid off the loan early, the bank would be obligated to go back and recalculate how much interest the borrower 'should have' paid vs. what they actually did (i.e. the borrower would have paid interest that they did not yet owe, but that's what advance payment of regular payments is precisely doing). In no way will they do that.
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Re: Paying "early" on mortgage may be unwise

Post by aristotelian » Thu Mar 28, 2019 11:33 am

I always paid the regular payment and then an extra payment through the bank website. I never had to specify anything. The extra payments reduced the principal, they did not just disappear.

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Re: Paying "early" on mortgage may be unwise

Post by vineviz » Thu Mar 28, 2019 11:33 am

TheTimeLord wrote:
Thu Mar 28, 2019 11:13 am
If you do this enough to actually pay off the loan, i.e. 360 payments in 15 years, they no longer have those future payments to assume to apply to because there is no balance thus there would be no interest owed. It only matters at payoff until then it is just an early payment.

How can I prepay a July 2020 payment if I don't owe a July 2020 payment and if I don't owe that payment how can I be charged interest for a non-existing payment.
I think what you're missing is that early payments don't reduce your balance. At all. Only additional payments of principal do that.

If you send in 1 payment this month or 100 payments this month, your balance is going to be same either way. Effectively it'd be the same as if you gave your neighbor the 100 checks with instructions to mail one each month. As far as the bank is concerned, it's the same thing.
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Re: Paying "early" on mortgage may be unwise

Post by acegolfer » Thu Mar 28, 2019 11:39 am

Oddball wrote:
Thu Mar 28, 2019 11:14 am
Is there a easy way to find out if extra paid on past payments when to principal or not? Plug in numbers to an online calculator and see where the principal would be at?

We have 2 mortgages, 1 condo mortgage which is currently a rental. DW bought the condo and lived there for years before we met and she use to pay extra every month (say the mortgage was $900, and she would pay $1000 each month instead). We use to do the same with our current place, pay a little extra each month. All of our payments have been electronic, just pulled from our checking accounts.
Curious about the easy way. As you said, I can only think about see where the balance would be at. If you used online payment, I'm certain the extra pmt went to principal. But if OP is correct, then it may not.

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Re: Paying "early" on mortgage may be unwise

Post by Quickfoot » Thu Mar 28, 2019 11:40 am

Advance payments aren't really credited at the time of payment, they are credited at the time they are due so you still pay interest as though you hadn't made an advance payment. With advance payments you are basically building up a savings account with the lender that they take your payment out of at the time the payment is due but you aren't paying down your principal sooner. For car loans there isn't necessarily a huge difference between prepayment and principal payments because the term is short but it matters on mortgages.

Say you have a $1,000 monthly payment on your mortgage and $750 is interest.

Scenario #1: You make a payment March 1st and then make an early payment March 15 and then make your normal payment April 1. You haven't paid down 1K principal with your extra payment, and the bank likely wont even apply the payment until the due date on your next payment and you will continue to pay interest as normal. Your April payment is now actually your June payment in advance and although you will pay off your mortgage faster you wont save interest. In most cases you also could skip a payment because you've prepaid a payment, you can see this online because the next due date for payment will be an extra month in the future.

Scenario #2: You make a payment payment March 1st and then make a principal payment March 15 and make your normal payment April 1. You were still obligated to make your normal April payment but you are paying less interest because of the 1K principal reduction.

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