Paying "early" on mortgage may be unwise

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AJS
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Re: Paying "early" on mortgage may be unwise

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vineviz
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Re: Paying "early" on mortgage may be unwise

Post by vineviz »

Oddball wrote: Thu Mar 28, 2019 11:14 am 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).
I've never seen a bank that intentionally applied that extra $100 to anything except principal. Not saying it doesn't happen, but that's my experience.

If you know the loan origination date, the original loan amount, the interest rate, and the monthly payment (principal + interest) you can easily calculate what the outstanding principal WOULD HAVE BEEN as of today in the absence of additional principal payments. There are many loan calculators online, but the PV function in Excel will do it too.

Also, you surely received a loan amortization schedule when you got the loan. If you kept it, you could just look it up there.
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Quickfoot
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Re: Paying "early" on mortgage may be unwise

Post by Quickfoot »

acegolfer wrote: 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.
Nearly every lender calls it out on your statement, you'll see the extra payment applied as principal reduction or a pre-payment. When you make the payment online you also typically elect whether to make an early payment or a principal payment. If you go into the branch you can tell the teller which type of payment you'd like to make.

If you pay a little extra, say $100 extra on your mortgage payment MOST lenders automatically apply the extra as a principal reduction. If you make full extra payments make sure they are being applied as principal and not advance payments.
Last edited by Quickfoot on Thu Mar 28, 2019 11:42 am, edited 1 time in total.
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Vulcan
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Re: Paying "early" on mortgage may be unwise

Post by Vulcan »

acegolfer wrote: 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.
Wells Fargo (to whom our most recent refinanced mortgage got assigned to service) has an option on their website to make principal only payment exclusively or in addition to the regular monthly payment.

I'd imagine it is similar with most mortgage servicers.
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Re: Paying "early" on mortgage may be unwise

Post by Quickfoot »

As a side note this is also why paying your mortgage payment 2 weeks early doesn't save you interest. Say your payment is due on the 1st and you make it on the 15th, what you've really effectively done is created a savings account with the lender that 2 weeks later your payment is paid from. Because the payment isn't applied until your due date you don't save interest.

There are a lot of people who truly believe making their payment 1-2 weeks early for 30 years is going to save them interest, unfortunately they are not correct.
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 »

vineviz wrote: 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.
Excellent explanation. :thumbsup
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dm200
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Re: Paying "early" on mortgage may be unwise

Post by dm200 »

Quickfoot wrote: Thu Mar 28, 2019 11:48 am As a side note this is also why paying your mortgage payment 2 weeks early doesn't save you interest. Say your payment is due on the 1st and you make it on the 15th, what you've really effectively done is created a savings account with the lender that 2 weeks later your payment is paid from. Because the payment isn't applied until your due date you don't save interest.
There are a lot of people who truly believe making their payment 1-2 weeks early for 30 years is going to save them interest, unfortunately they are not correct.
Yes - exactly my point.

I would, and do, normally send my mortgage payment just a few days early just to make sure that it gets there "on time" since there can be delays in the mail.
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Re: Paying "early" on mortgage may be unwise

Post by rkhusky »

Quickfoot wrote: Thu Mar 28, 2019 11:48 am There are a lot of people who truly believe making their payment 1-2 weeks early for 30 years is going to save them interest, unfortunately they are not correct.
Not anyone that actually looks at their mortgage statement.
vested1
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Re: Paying "early" on mortgage may be unwise

Post by vested1 »

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.
I don't know, it kind of makes sense for us, not only from a psychological perspective, but from a financial one as well. The plan I initiated last year when our mortgage balance was $194,000 pays $165,000 in 5 lump sum payments to zero out our mortgage in January of 2021, eliminating 19.5 years of payments with a P&I amount of about $15,000 a year. 19.5 x 15 = $292,500 (additional amount past January 2021, 22 months hence) with no plan. There is also the age factor for mortgage payoff, which equates to me being 88 with no plan, instead of 68.5 with the plan. The plan encompasses 30 months from inception to completion.

It's tempting to extrapolate optimistic projections of market growth during arguments discouraging a mortgage payoff. The possibility of a negative return in the markets is rarely considered, whereas increased home equity is often discounted.

Some who make the argument that you are passing up the opportunity to make more in the markets ignore the increase in monthly principal amounts immediately after lump sum payments against principal. In March our regular payment reduced $640 of principal. In April that number immediately increases to about $870. In February of 2020 after our next lump sum payment that number will rise to $1,131 against principal with $110 in interest. For tax purposes, the change in the tax law makes early payoff more attractive since our mortgage interest and SALT are now less than our standard deductions. If the law sunsets it won't matter, since the mortgage will be paid off by then.

The other opposing argument most commonly used is the folly of an early mortgage payoff when the P&I is less than what would be paid for rent on a comparable property. This argument doesn't relate to us because we are not renting, so it's an apples to oranges comparison.

Paying off a mortgage early also makes less sense in an area with volatile swings in home value, because you may be caught short if the market tanks before you are ready to sell. Right now our mortgage payout plan is like transferring money from one pocket to the other.

Lastly, and hopefully an end to this tome, is the fact that in order to come up with a hypothetical P&I of $1,000, taxes must be paid to obtain that amount, say 20% on a combined federal and State basis. So $1,000 become $1,200 in real terms in order to make that payment. Other than an inheritance, taxes must be paid on income that is used to pay the mortgage, with only a few exceptions. The gain on Roth is tax free of course, but only after being invested for 5 years. Once the mortgage is paid off, that $1,000 is an after tax increase in income that will positively affect your budget flexibility, giving you more options. Our plan calls for $21,000 extra in federal and State taxes over 30 months (8k remaining), but by using strategic withdrawals in a combination of taxable and non-taxable income it had less of a negative impact.
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Re: Paying "early" on mortgage may be unwise

Post by Ketawa »

Prepaying a mortgage vs investing in fixed income has been rehashed too many times to count on this board, but here we go again.

I made this point in another recent thread, but there is something else that goes unexamined by many posters who claim that rates are historically low, therefore keeping a long term mortgage is a wise choice. If your strategy is to bank on mortgage rates going up in the future, you shouldn't be comparing 30 year rates now vs 30 year rates then.

For example, say you're 5 years into a 30 year mortgage. 10 years from now, rates are higher and your 30 year rate is a good deal. Well, the 30 year rate isn't relevant. You should be looking at the 15 year rate, which will be lower. Are you betting that rates will go so much higher that the guaranteed savings now by prepaying will be outweighed by the hypothetical savings of your current rate vs rates on a shorter term mortgage?

All of this is already priced into the yield curve. I rarely think it makes sense to open a taxable account while simultaneously having a long term mortgage unless you are already 100% stocks and want more leverage.
Quickfoot wrote: 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.
This is fundamentally wrong. Fixed income investments are investments, plain and simple. You lend money to someone with the expectation you will receive interest and your principal back in the future.

Insurance protects against losses by pooling risk across many people. For example, it is impossible to actually create your own SPIA with fixed income since you cannot insure against your own longevity risk.
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

rkhusky wrote: Thu Mar 28, 2019 11:58 am
Quickfoot wrote: Thu Mar 28, 2019 11:48 am There are a lot of people who truly believe making their payment 1-2 weeks early for 30 years is going to save them interest, unfortunately they are not correct.
Not anyone that actually looks at their mortgage statement.
I do! I like to see how much principal I'm knocking off each month at my 2.25% 15 year rate <humble brag>!

Do people really send payments early? Is that a thing? Or send in advance payments? Why not just keep the money to be used in case of emergency?

I mean I guess if you use postal mail and are worried about being late.

I almost always pay mine on the 7th, never past the 14th, and almost never on the 1st.

This thread reminds me off all those solicitations for the "magic" plan whereby you make bi-weekly payments instead of monthly and pay off your note faster. Because...duh.
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dm200
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Re: Paying "early" on mortgage may be unwise

Post by dm200 »

Wearing my previous hat doing consumer lending, I have noticed a very common practice of folks with a mortgage and carrying credit card balances.

They correctly make extra principal payments on their mortgage, while continuing to carry (and pay interest on) credit card balances every month. When I ask them, their response/logic goes something like this:

I pay the mortgage early to save interest because it is a long term debt/obligation. I believe I will soon pay off the credit card balances - and they are shorter term.

An example of an incorrect conclusion based on faulty "logic".
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

vested1 wrote: Thu Mar 28, 2019 12:04 pm
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.
I don't know, it kind of makes sense for us, not only from a psychological perspective, but from a financial one as well. The plan I initiated last year when our mortgage balance was $194,000 pays $165,000 in 5 lump sum payments to zero out our mortgage in January of 2021, eliminating 19.5 years of payments with a P&I amount of about $15,000 a year. 19.5 x 15 = $292,500 (additional amount past January 2021, 22 months hence) with no plan. There is also the age factor for mortgage payoff, which equates to me being 88 with no plan, instead of 68.5 with the plan. The plan encompasses 30 months from inception to completion.

It's tempting to extrapolate optimistic projections of market growth during arguments discouraging a mortgage payoff. The possibility of a negative return in the markets is rarely considered, whereas increased home equity is often discounted.

Some who make the argument that you are passing up the opportunity to make more in the markets ignore the increase in monthly principal amounts immediately after lump sum payments against principal. In March our regular payment reduced $640 of principal. In April that number immediately increases to about $870. In February of 2020 after our next lump sum payment that number will rise to $1,131 against principal with $110 in interest. For tax purposes, the change in the tax law makes early payoff more attractive since our mortgage interest and SALT are now less than our standard deductions. If the law sunsets it won't matter, since the mortgage will be paid off by then.

The other opposing argument most commonly used is the folly of an early mortgage payoff when the P&I is less than what would be paid for rent on a comparable property. This argument doesn't relate to us because we are not renting, so it's an apples to oranges comparison.

Paying off a mortgage early also makes less sense in an area with volatile swings in home value, because you may be caught short if the market tanks before you are ready to sell. Right now our mortgage payout plan is like transferring money from one pocket to the other.

Lastly, and hopefully an end to this tome, is the fact that in order to come up with a hypothetical P&I of $1,000, taxes must be paid to obtain that amount, say 20% on a combined federal and State basis. So $1,000 become $1,200 in real terms in order to make that payment. Other than an inheritance, taxes must be paid on income that is used to pay the mortgage, with only a few exceptions. The gain on Roth is tax free of course, but only after being invested for 5 years. Once the mortgage is paid off, that $1,000 is an after tax increase in income that will positively affect your budget flexibility, giving you more options. Our plan calls for $21,000 extra in federal and State taxes over 30 months (8k remaining), but by using strategic withdrawals in a combination of taxable and non-taxable income it had less of a negative impact.
Your plan is a modified "pay off" plan not really a "pay down" or "pay early" plan. Most on the board make a distinction b/w pay off and pay down, the former being advantageous in many cases (not least to reduce expenses/portfolio draw in retirement).
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Re: Paying "early" on mortgage may be unwise

Post by LiterallyIronic »

Admiral wrote: Thu Mar 28, 2019 12:09 pm Do people really send payments early? Is that a thing? Or send in advance payments? Why not just keep the money to be used in case of emergency?

I mean I guess if you use postal mail and are worried about being late.

I almost always pay mine on the 7th, never past the 14th, and almost never on the 1st.
I absolutely do. It's due on the 1st of the month, but I always pay it the Friday prior to that. You never know if something is going to come up that will make me unable to pay it before the grace period comes and goes, like if I randomly got hospitalized or something. Wouldn't want to risk being late on a payment. Plus, doing this provides me with greater consistency when I calculate my net worth on the first of every month.
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Re: Paying "early" on mortgage may be unwise

Post by mighty72 »

vineviz wrote: 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.
Sorry but I am sure this is not correct. I made 2 payments this month (Mar'19). Both payments show up as of the date the payment was made. And in both cases, I see that principal remaining of that date has gone down. Even when you pay down principal, the bank doesn't reduce your monthly payment. It does somehow figure out that that you principal will be paid off earlier and then you don't pay interest on the remaining amount.

I agree that it didn't reduce the principal by total amount and only by the amortized amount. It would be great if someone can provide documentation which indicates otherwise.
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Re: Paying "early" on mortgage may be unwise

Post by 2015 »

RL1013 wrote: Thu Mar 28, 2019 9:50 am There are different kind of folks with different mindsets. There is no one size fits all.
...
Precisely. I haven't had a mortgage in decades. It's worked for the purposes and within the confines of my own complex adaptive system. I don't care what others have done, are doing, or will do.

I never look for what's "best", what's considered THE answer. I look for what works within that system otherwise known as my life. No one who writes in the areas of investing, personal finance, and microeconomics will ever be able to answer that for me. I've found it far more valuable to focus on risk mitigation, expanding effective decision making capabilities and creating options of all kinds than to be obsessed with The Most Clever Strategy (which, in a complex system, doesn't exist anyway).
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

LiterallyIronic wrote: Thu Mar 28, 2019 12:18 pm
Admiral wrote: Thu Mar 28, 2019 12:09 pm Do people really send payments early? Is that a thing? Or send in advance payments? Why not just keep the money to be used in case of emergency?

I mean I guess if you use postal mail and are worried about being late.

I almost always pay mine on the 7th, never past the 14th, and almost never on the 1st.
I absolutely do. It's due on the 1st of the month, but I always pay it the Friday prior to that. You never know if something is going to come up that will make me unable to pay it before the grace period comes and goes, like if I randomly got hospitalized or something. Wouldn't want to risk being late on a payment. Plus, doing this provides me with greater consistency when I calculate my net worth on the first of every month.
Are you unfamiliar with your bank's automated bill-pay feature. It's like magic. It works even if you're in a coma...
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Re: Paying "early" on mortgage may be unwise

Post by vested1 »

Admiral wrote: Thu Mar 28, 2019 12:14 pm
vested1 wrote: Thu Mar 28, 2019 12:04 pm
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.
I don't know, it kind of makes sense for us, not only from a psychological perspective, but from a financial one as well. The plan I initiated last year when our mortgage balance was $194,000 pays $165,000 in 5 lump sum payments to zero out our mortgage in January of 2021, eliminating 19.5 years of payments with a P&I amount of about $15,000 a year. 19.5 x 15 = $292,500 (additional amount past January 2021, 22 months hence) with no plan. There is also the age factor for mortgage payoff, which equates to me being 88 with no plan, instead of 68.5 with the plan. The plan encompasses 30 months from inception to completion.

It's tempting to extrapolate optimistic projections of market growth during arguments discouraging a mortgage payoff. The possibility of a negative return in the markets is rarely considered, whereas increased home equity is often discounted.

Some who make the argument that you are passing up the opportunity to make more in the markets ignore the increase in monthly principal amounts immediately after lump sum payments against principal. In March our regular payment reduced $640 of principal. In April that number immediately increases to about $870. In February of 2020 after our next lump sum payment that number will rise to $1,131 against principal with $110 in interest. For tax purposes, the change in the tax law makes early payoff more attractive since our mortgage interest and SALT are now less than our standard deductions. If the law sunsets it won't matter, since the mortgage will be paid off by then.

The other opposing argument most commonly used is the folly of an early mortgage payoff when the P&I is less than what would be paid for rent on a comparable property. This argument doesn't relate to us because we are not renting, so it's an apples to oranges comparison.

Paying off a mortgage early also makes less sense in an area with volatile swings in home value, because you may be caught short if the market tanks before you are ready to sell. Right now our mortgage payout plan is like transferring money from one pocket to the other.

Lastly, and hopefully an end to this tome, is the fact that in order to come up with a hypothetical P&I of $1,000, taxes must be paid to obtain that amount, say 20% on a combined federal and State basis. So $1,000 become $1,200 in real terms in order to make that payment. Other than an inheritance, taxes must be paid on income that is used to pay the mortgage, with only a few exceptions. The gain on Roth is tax free of course, but only after being invested for 5 years. Once the mortgage is paid off, that $1,000 is an after tax increase in income that will positively affect your budget flexibility, giving you more options. Our plan calls for $21,000 extra in federal and State taxes over 30 months (8k remaining), but by using strategic withdrawals in a combination of taxable and non-taxable income it had less of a negative impact.
Your plan is a modified "pay off" plan not really a "pay down" or "pay early" plan. Most on the board make a distinction b/w pay off and pay down, the former being advantageous in many cases (not least to reduce expenses/portfolio draw in retirement).
True, but the ultimate goal of each is the elimination of the mortgage. Add to that (in our case) having to pay an additional amount of income tax for 19.5 years (with no plan) on the money used to pay the P&I, a factor I left out, but one that is certainly meaningful.
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Re: Paying "early" on mortgage may be unwise

Post by vested1 »

2015 wrote: Thu Mar 28, 2019 12:25 pm
RL1013 wrote: Thu Mar 28, 2019 9:50 am There are different kind of folks with different mindsets. There is no one size fits all.
...
Precisely. I haven't had a mortgage in decades. It's worked for the purposes and within the confines of my own complex adaptive system. I don't care what others have done, are doing, or will do.

I never look for what's "best", what's considered THE answer. I look for what works within that system otherwise known as my life. No one who writes in the areas of investing, personal finance, and microeconomics will ever be able to answer that for me. I've found it far more valuable to focus on risk mitigation, expanding effective decision making capabilities and creating options of all kinds than to be obsessed with The Most Clever Strategy (which, in a complex system, doesn't exist anyway).
+1
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 »

Quickfoot wrote: Thu Mar 28, 2019 11:48 am As a side note this is also why paying your mortgage payment 2 weeks early doesn't save you interest. Say your payment is due on the 1st and you make it on the 15th, what you've really effectively done is created a savings account with the lender that 2 weeks later your payment is paid from. Because the payment isn't applied until your due date you don't save interest.

There are a lot of people who truly believe making their payment 1-2 weeks early for 30 years is going to save them interest, unfortunately they are not correct.
One financial writer who was popular in the 1980s, Charles Givens, tried to take advantage of that fact in his younger days as a landlord. His tenants had to pay their rent on the first day of the month, but his mortgage company had a grace period that extended to the 15th, so he floated everyone's payments in a savings account (when they actually had good yields) for two weeks. But he soon found out that they were dinging his credit for making payments after the due date and consequently had to stop the practice.
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

mighty72 wrote: Thu Mar 28, 2019 12:21 pm
vineviz wrote: 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.
Sorry but I am sure this is not correct. I made 2 payments this month (Mar'19). Both payments show up as of the date the payment was made. And in both cases, I see that principal remaining of that date has gone down. Even when you pay down principal, the bank doesn't reduce your monthly payment. It does somehow figure out that that you principal will be paid off earlier and then you don't pay interest on the remaining amount.

I agree that it didn't reduce the principal by total amount and only by the amortized amount. It would be great if someone can provide documentation which indicates otherwise.
The second payment is still applied to the balance (in the ratio of P:I) so of course the interest-bearing balance will go down, and subsequent payments will have a slightly larger ratio of P:I. The interest rate is always charges on the remaining balance, whatever that is. If you make extra payments, the loan will be paid off more quickly.
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Re: Paying "early" on mortgage may be unwise

Post by LongRoad »

28fe6 wrote: 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.
I believe it turns out that if the mortgage interest is non-deductible, then even completely tax free interest in the investment account is losing by comparison. This comparison is apples-to-apples (no adjustments to the raw rates are needed) because both are completely post-tax numbers. If the investment is merely tax-deferred, it fares even worse.

The comparison is somewhat better for the investment account if the mortgage is fully deductible.
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 »

Admiral wrote: Thu Mar 28, 2019 12:33 pm
mighty72 wrote: Thu Mar 28, 2019 12:21 pm
vineviz wrote: 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.
Sorry but I am sure this is not correct. I made 2 payments this month (Mar'19). Both payments show up as of the date the payment was made. And in both cases, I see that principal remaining of that date has gone down. Even when you pay down principal, the bank doesn't reduce your monthly payment. It does somehow figure out that that you principal will be paid off earlier and then you don't pay interest on the remaining amount.

I agree that it didn't reduce the principal by total amount and only by the amortized amount. It would be great if someone can provide documentation which indicates otherwise.
The second payment is still applied to the balance (in the ratio of P:I) so of course the interest-bearing balance will go down, and subsequent payments will have a slightly larger ratio of P:I. The interest rate is always charges on the remaining balance, whatever that is. If you make extra payments, the loan will be paid off more quickly.
Only principal payments treated as such by your lender will result in the mortgage being paid off faster. Making regular payments in advance does not reduce the amount of mortgage interest you pay. I know this from experience working in the mortgage industry.
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

LongRoad wrote: Thu Mar 28, 2019 12:40 pm
28fe6 wrote: 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.
I believe it turns out that if the mortgage interest is non-deductible, then even completely tax free interest in the investment account is losing by comparison. This comparison is apples-to-apples (no adjustments to the raw rates are needed) because both are completely post-tax numbers. If the investment is merely tax-deferred, it fares even worse.

The comparison is somewhat better for the investment account if the mortgage is fully deductible.
But there's another issue at play. There is no immediate benefit (tax or otherwise) to paying early on the mortgage, save the reduction in interest on the principal amount paid over the remaining time of the loan. You pay the money, and it's gone.

The benefit only becomes "real" (or perhaps "spendable") when the loan is paid off. Conversely, the benefits of, say, a bond, accrue immediately, in the form of interest, which can then be reinvested (and typically is, in a retirement account). The monetary gain compounds over time. It can also gain with changes in interest rates (or lose, of course).

If I chose to, I could take the $1,000 per month I put into my retirement accounts (at 25% taxation), pay the tax on it (requiring $1250 of pretax income) and put it toward my mortgage. But how does that help me before the mortgage is eliminated?
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

willthrill81 wrote: Thu Mar 28, 2019 12:45 pm
Admiral wrote: Thu Mar 28, 2019 12:33 pm
mighty72 wrote: Thu Mar 28, 2019 12:21 pm
vineviz wrote: 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.
Sorry but I am sure this is not correct. I made 2 payments this month (Mar'19). Both payments show up as of the date the payment was made. And in both cases, I see that principal remaining of that date has gone down. Even when you pay down principal, the bank doesn't reduce your monthly payment. It does somehow figure out that that you principal will be paid off earlier and then you don't pay interest on the remaining amount.

I agree that it didn't reduce the principal by total amount and only by the amortized amount. It would be great if someone can provide documentation which indicates otherwise.
The second payment is still applied to the balance (in the ratio of P:I) so of course the interest-bearing balance will go down, and subsequent payments will have a slightly larger ratio of P:I. The interest rate is always charges on the remaining balance, whatever that is. If you make extra payments, the loan will be paid off more quickly.
Only principal payments treated as such by your lender will result in the mortgage being paid off faster. Making regular payments in advance does not reduce the amount of mortgage interest you pay. I know this from experience working in the mortgage industry.
Part of his payment every month IS principal--thus the outstanding balance is reduced by that amount.

Let's extrapolate: Are you saying that if I have 10 monthly payments left on my note, and I make all ten this month, that I will have 9 more months remaining? What am I paying for? If the payment/s is/are credited, then the mortgage has been paid off.

EDIT TO ADD: perhaps the confusion lies in the meaning of "extra" versus "early." If one makes all their normal payments at once, are those "extra" payments, or "early" payments?
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Re: Paying "early" on mortgage may be unwise

Post by mighty72 »

Admiral wrote: Thu Mar 28, 2019 12:33 pm
mighty72 wrote: Thu Mar 28, 2019 12:21 pm
vineviz wrote: Thu Mar 28, 2019 11:33 am
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.
Sorry but I am sure this is not correct. I made 2 payments this month (Mar'19). Both payments show up as of the date the payment was made. And in both cases, I see that principal remaining of that date has gone down. Even when you pay down principal, the bank doesn't reduce your monthly payment. It does somehow figure out that that you principal will be paid off earlier and then you don't pay interest on the remaining amount.

I agree that it didn't reduce the principal by total amount and only by the amortized amount. It would be great if someone can provide documentation which indicates otherwise.
The second payment is still applied to the balance (in the ratio of P:I) so of course the interest-bearing balance will go down, and subsequent payments will have a slightly larger ratio of P:I. The interest rate is always charges on the remaining balance, whatever that is. If you make extra payments, the loan will be paid off more quickly.
Yes, this makes sense and is my understanding too
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 »

Admiral wrote: Thu Mar 28, 2019 12:56 pm
willthrill81 wrote: Thu Mar 28, 2019 12:45 pm
Admiral wrote: Thu Mar 28, 2019 12:33 pm
mighty72 wrote: Thu Mar 28, 2019 12:21 pm
vineviz wrote: Thu Mar 28, 2019 11:33 am

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.
Sorry but I am sure this is not correct. I made 2 payments this month (Mar'19). Both payments show up as of the date the payment was made. And in both cases, I see that principal remaining of that date has gone down. Even when you pay down principal, the bank doesn't reduce your monthly payment. It does somehow figure out that that you principal will be paid off earlier and then you don't pay interest on the remaining amount.

I agree that it didn't reduce the principal by total amount and only by the amortized amount. It would be great if someone can provide documentation which indicates otherwise.
The second payment is still applied to the balance (in the ratio of P:I) so of course the interest-bearing balance will go down, and subsequent payments will have a slightly larger ratio of P:I. The interest rate is always charges on the remaining balance, whatever that is. If you make extra payments, the loan will be paid off more quickly.
Only principal payments treated as such by your lender will result in the mortgage being paid off faster. Making regular payments in advance does not reduce the amount of mortgage interest you pay. I know this from experience working in the mortgage industry.
Part of his payment every month IS principal--thus the outstanding balance is reduced by that amount.

Let's extrapolate: Are you saying that if I have 10 monthly payments left on my note, and I make all ten this month, that I will have 9 more months remaining? What am I paying for? If the payment/s is/are credited, then the mortgage has been paid off.

EDIT TO ADD: perhaps the confusion lies in the meaning of "extra" versus "early." If one makes all their normal payments at once, are those "extra" payments, or "early" payments?
I can tell you from experience that making your mortgage payment for May, 2019, any time before it is due will not save you a cent of mortgage interest. TMK, only mortgages are treated this way, which is why many get confused about it. The amortization schedule does not change when regular payments are made, regardless of when they are made.

If I were to make my April, 2019, mortgage payment and my May, 2019 mortgage payment at the same time, the mortgage company will post the May, 2019, payment on the day it is received but treat it for the purposes of determining how much of the principal & interest portion goes to interest as though it occurred in May, 2019, and not before.
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Re: Paying "early" on mortgage may be unwise

Post by Hamberders »

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’ve never made extra payments to my mortgage. If I pay extra payments in a year, my bank’s Form 1098 for that year will show a total interest amount as if no extra payments were made? And the same will happen in all following years until the principal is paid off?

I didn’t read through all of the replies in this thread.
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

willthrill81 wrote: Thu Mar 28, 2019 1:04 pm
Admiral wrote: Thu Mar 28, 2019 12:56 pm
willthrill81 wrote: Thu Mar 28, 2019 12:45 pm
Admiral wrote: Thu Mar 28, 2019 12:33 pm
mighty72 wrote: Thu Mar 28, 2019 12:21 pm
Sorry but I am sure this is not correct. I made 2 payments this month (Mar'19). Both payments show up as of the date the payment was made. And in both cases, I see that principal remaining of that date has gone down. Even when you pay down principal, the bank doesn't reduce your monthly payment. It does somehow figure out that that you principal will be paid off earlier and then you don't pay interest on the remaining amount.

I agree that it didn't reduce the principal by total amount and only by the amortized amount. It would be great if someone can provide documentation which indicates otherwise.
The second payment is still applied to the balance (in the ratio of P:I) so of course the interest-bearing balance will go down, and subsequent payments will have a slightly larger ratio of P:I. The interest rate is always charges on the remaining balance, whatever that is. If you make extra payments, the loan will be paid off more quickly.
Only principal payments treated as such by your lender will result in the mortgage being paid off faster. Making regular payments in advance does not reduce the amount of mortgage interest you pay. I know this from experience working in the mortgage industry.
Part of his payment every month IS principal--thus the outstanding balance is reduced by that amount.

Let's extrapolate: Are you saying that if I have 10 monthly payments left on my note, and I make all ten this month, that I will have 9 more months remaining? What am I paying for? If the payment/s is/are credited, then the mortgage has been paid off.

EDIT TO ADD: perhaps the confusion lies in the meaning of "extra" versus "early." If one makes all their normal payments at once, are those "extra" payments, or "early" payments?
I can tell you from experience that making your mortgage payment for May, 2019, any time before it is due will not save you a cent of mortgage interest. TMK, only mortgages are treated this way, which is why many get confused about it. The amortization schedule does not change when regular payments are made, regardless of when they are made.

If I were to make my April, 2019, mortgage payment and my May, 2019 mortgage payment at the same time, the mortgage company will post the May, 2019, payment as though it occurred on May, 2019, and not before.
That can only be true if the mortgage company waits to credit the payment. Another poster indicted this is not the case. If the payment is credited early, the principal remaining is reduced, and the mortgage is paid off earlier. My point was that if you make a ton of "early" payments, and they are credited, the effect is to reduce the term. Obvs if they are not credited early, they won't.
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 »

Hamberders wrote: Thu Mar 28, 2019 1:06 pm
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’ve never made extra payments to my mortgage. If I pay extra payments in a year, my bank’s Form 1098 for that year will show a total interest amount as if no extra payments were made? And the same will happen in all following years until the principal is paid off?
Let's say that in 2018, you paid all of that year's regular payments in addition to all of 2019's regular payments. TMK, your 1098 for 2018 will reflect only the interest associated with your 2018 regular payments and not the interest from the 2019 payments. Those will show up in your 1098 for 2019.
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Re: Paying "early" on mortgage may be unwise

Post by willthrill81 »

Admiral wrote: Thu Mar 28, 2019 1:10 pm
willthrill81 wrote: Thu Mar 28, 2019 1:04 pmI can tell you from experience that making your mortgage payment for May, 2019, any time before it is due will not save you a cent of mortgage interest. TMK, only mortgages are treated this way, which is why many get confused about it. The amortization schedule does not change when regular payments are made, regardless of when they are made.

If I were to make my April, 2019, mortgage payment and my May, 2019 mortgage payment at the same time, the mortgage company will post the May, 2019, payment as though it occurred on May, 2019, and not before.
That can only be true if the mortgage company waits to credit the payment. Another poster indicted this is not the case. If the payment is credited early, the principal remaining is reduced, and the mortgage is paid off earlier. My point was that if you make a ton of "early" payments, and they are credited, the effect is to reduce the term. Obvs if they are not credited early, they won't.
Yes, they will post the regular payment as of the day it is received. But for the purpose of determining how much of that payment goes to interest, it is treated as having been paid on the date it was due. TMK, only mortgages work this way.

This is not the only unique feature of mortgage interest. TMK, as far as debt instruments go, only mortgages calculate interest on a monthly basis rather than a daily basis (e.g. making a principal payment on the 2nd of the month vs. the 28th of that month does not change the interest you pay for that month).

Again, this can be easily verified. When you make your next regular mortgage payment, make the following month's at the same time. When they both post, the principal and interest of the second payment will be exactly the same as if you had paid it on the due date, the same as the amortization schedule indicates.
Last edited by willthrill81 on Thu Mar 28, 2019 1:23 pm, edited 1 time in total.
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Re: Paying "early" on mortgage may be unwise

Post by LiterallyIronic »

Admiral wrote: Thu Mar 28, 2019 12:26 pm
LiterallyIronic wrote: Thu Mar 28, 2019 12:18 pm
Admiral wrote: Thu Mar 28, 2019 12:09 pm Do people really send payments early? Is that a thing? Or send in advance payments? Why not just keep the money to be used in case of emergency?

I mean I guess if you use postal mail and are worried about being late.

I almost always pay mine on the 7th, never past the 14th, and almost never on the 1st.
I absolutely do. It's due on the 1st of the month, but I always pay it the Friday prior to that. You never know if something is going to come up that will make me unable to pay it before the grace period comes and goes, like if I randomly got hospitalized or something. Wouldn't want to risk being late on a payment. Plus, doing this provides me with greater consistency when I calculate my net worth on the first of every month.
Are you unfamiliar with your bank's automated bill-pay feature. It's like magic. It works even if you're in a coma...
LOL. Yeah, I'm familiar with automatic bill-pay. Whenever we get a new teller at the bank, (s)he invariably asks me when I'm getting a money order to pay the electric bill or whatever, "You know we have bill-pay, right?" and the rest of the tellers just roll their eyes because of how many times I've been asked that. I trust myself more than I trust computers. No bill pay, no cruise control, no automation. :beer
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Re: Paying "early" on mortgage may be unwise

Post by vineviz »

Admiral wrote: Thu Mar 28, 2019 1:10 pm
willthrill81 wrote: Thu Mar 28, 2019 1:04 pmIf I were to make my April, 2019, mortgage payment and my May, 2019 mortgage payment at the same time, the mortgage company will post the May, 2019, payment as though it occurred on May, 2019, and not before.
That can only be true if the mortgage company waits to credit the payment. Another poster indicted this is not the case.
There are two possibilities when you make an irregular payment on a mortgage:

A) If you make an EXTRA payment it gets applied ("credited") to principal when received, which reduces the amount of interest you ultimate pay on the mortgage.

B) If you make an EARLY payment it gets applied ("credited") to principal and interest on the next due date, which does NOT reduce the amount of interest you ultimate pay on the mortgage.

If you specify which option, A or B, you want the mortgage company to use then must (within parameters) follow your instructions.

If you do NOT specify which option, A or B, you want the mortgage company to use then it could go either way. Some mortgage companies default to option A and some default to option B.

It probably pays to know which is the default at YOUR mortgage company, but it definitely pays to specify the option instead of leaving it up to chance.
Last edited by vineviz on Thu Mar 28, 2019 1:35 pm, edited 1 time in total.
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Re: Paying "early" on mortgage may be unwise

Post by Gufomel »

I’ve learned something new today - that people are still manually paying their monthly mortgage payments :shock:
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

Gufomel wrote: Thu Mar 28, 2019 1:30 pm I’ve learned something new today - that people are still manually paying their monthly mortgage payments :shock:
With money orders, apparently. The Post Office thanks you!
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Re: Paying "early" on mortgage may be unwise

Post by Pigeye Brewster »

vineviz wrote: Thu Mar 28, 2019 1:27 pm
Admiral wrote: Thu Mar 28, 2019 1:10 pm
If I were to make my April, 2019, mortgage payment and my May, 2019 mortgage payment at the same time, the mortgage company will post the May, 2019, payment as though it occurred on May, 2019, and not before.
That can only be true if the mortgage company waits to credit the payment. Another poster indicted this is not the case.
There are two possibilities when you make an irregular payment on a mortgage:

A) If you make an EXTRA payment it gets applied ("credited") to principal when received, which reduces the amount of interest you ultimate pay on the mortgage.

B) If you make an EARLY payment it gets applied ("credited") to principal and interest on the next due date, which does NOT reduce the amount of interest you ultimate pay on the mortgage.

If you specify which option, A or B, you want the mortgage company to use then must (within parameters) follow your instructions.

If you do NOT specify which option, A or B, you want the mortgage company to use then it could go either way. Some mortgage companies default to option A and some default to option B.

It probably pays to know which is the default at YOUR mortgage company, but it definitely pays to specify the option instead of leaving it up to chance.
This is excellent advice. I pay my mortgage electronically via online banking (so no way to designate extra principal) and make an additional principal payment that is less than the scheduled payment. It always gets applied to principal. A couple of times, however, I've made paid additional principal exceeding the scheduled amount. Both times they applied the amount of the scheduled payment to the next payment and only applied the amount above that to principal. They changed the entire additional amount to principal reduction after I emailed them about it.
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Re: Paying "early" on mortgage may be unwise

Post by LiterallyIronic »

Admiral wrote: Thu Mar 28, 2019 1:39 pm
Gufomel wrote: Thu Mar 28, 2019 1:30 pm I’ve learned something new today - that people are still manually paying their monthly mortgage payments :shock:
With money orders, apparently. The Post Office thanks you!
LOL. But, no, I don't pay the mortgage with a money order. I just have the teller transfer money from my checking account to my mortgage. The money orders are for my utility bills, which I don't mail either - I drive them to the utility company's office and hand-deliver them. Sorry, USPS. :wink:
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Re: Paying "early" on mortgage may be unwise

Post by Admiral »

LiterallyIronic wrote: Thu Mar 28, 2019 1:51 pm
Admiral wrote: Thu Mar 28, 2019 1:39 pm
Gufomel wrote: Thu Mar 28, 2019 1:30 pm I’ve learned something new today - that people are still manually paying their monthly mortgage payments :shock:
With money orders, apparently. The Post Office thanks you!
LOL. But, no, I don't pay the mortgage with a money order. I just have the teller transfer money from my checking account to my mortgage. The money orders are for my utility bills, which I don't mail either - I drive them to the utility company's office and hand-deliver them. Sorry, USPS. :wink:
That teller will be replaced by a terminal very soon, already happened at my bank (2/3 are gone). You may need to explore Pony Express or Telegraph.
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Re: Paying "early" on mortgage may be unwise

Post by LongRoad »

Admiral wrote: Thu Mar 28, 2019 12:52 pm
LongRoad wrote: Thu Mar 28, 2019 12:40 pm
28fe6 wrote: 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.
I believe it turns out that if the mortgage interest is non-deductible, then even completely tax free interest in the investment account is losing by comparison. This comparison is apples-to-apples (no adjustments to the raw rates are needed) because both are completely post-tax numbers. If the investment is merely tax-deferred, it fares even worse.

The comparison is somewhat better for the investment account if the mortgage is fully deductible.
But there's another issue at play. There is no immediate benefit (tax or otherwise) to paying early on the mortgage, save the reduction in interest on the principal amount paid over the remaining time of the loan. You pay the money, and it's gone.

The benefit only becomes "real" (or perhaps "spendable") when the loan is paid off. Conversely, the benefits of, say, a bond, accrue immediately, in the form of interest, which can then be reinvested (and typically is, in a retirement account). The monetary gain compounds over time. It can also gain with changes in interest rates (or lose, of course).

If I chose to, I could take the $1,000 per month I put into my retirement accounts (at 25% taxation), pay the tax on it (requiring $1250 of pretax income) and put it toward my mortgage. But how does that help me before the mortgage is eliminated?
Thanks for your response. I've learned a tremendous amount over the years lurking (and finally, occasionally posting) here.

To me the issue is liquidity, and I'd agree that a mortgage pre-payment is illiquid because obviously you cannot turn around and spend that same dollar elsewhere. Of course, the dollar that is alternatively placed in your 401(k) is also relatively illiquid. It isn't easily spendable until retirement (or 59.5, or 55, etc.).

The dollar that prepays your mortgage also compounds, just like the dollar in your 401(k). The balance sheet benefit is immediate, but the cash flow benefit indeed doesn't appear until later as avoided interest.

Don't want to give the impression that I'm suggesting or myself throwing every leftover dollar at the mortgage, because that isn't the case. The liquidity preference is real. Perhaps overstating to make the point that prepaying can be a reasonable -- and financially, not just emotionally, justified -- alternative to holding both a mortgage and lower yielding bonds at the same time, especially if the mortgage is non-deductible. And of course it doesn't need to be all or nothing.
LiterallyIronic
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Re: Paying "early" on mortgage may be unwise

Post by LiterallyIronic »

Admiral wrote: Thu Mar 28, 2019 1:53 pm
LiterallyIronic wrote: Thu Mar 28, 2019 1:51 pm
Admiral wrote: Thu Mar 28, 2019 1:39 pm
Gufomel wrote: Thu Mar 28, 2019 1:30 pm I’ve learned something new today - that people are still manually paying their monthly mortgage payments :shock:
With money orders, apparently. The Post Office thanks you!
LOL. But, no, I don't pay the mortgage with a money order. I just have the teller transfer money from my checking account to my mortgage. The money orders are for my utility bills, which I don't mail either - I drive them to the utility company's office and hand-deliver them. Sorry, USPS. :wink:
That teller will be replaced by a terminal very soon, already happened at my bank (2/3 are gone). You may need to explore Pony Express or Telegraph.
LOL! I ran into that problem recently when I went into McDonalds to get a burger as a gift for a relative who was in a hospital. Signs all over the cashier's area telling me to order with the electronic terminals that were behind me. I just stood there at the cash registers for several minutes and eventually someone came and took my order. I'll change banks before I use a "virtual teller terminal." What's next, you want me to use a self-checkout grocery lane? :shock: I don't leave my house to go around pushing buttons on screens; I leave my house to interact with people.
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Noble Knight
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Re: Paying "early" on mortgage may be unwise

Post by Noble Knight »

I still scratch my head that a lot of people on this forum pay off their mortgage early. If I was the richest person in the world I would still get a mortgage with today's rates.
rkhusky
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Re: Paying "early" on mortgage may be unwise

Post by rkhusky »

LongRoad wrote: Thu Mar 28, 2019 2:11 pm
To me the issue is liquidity, and I'd agree that a mortgage pre-payment is illiquid because obviously you cannot turn around and spend that same dollar elsewhere. Of course, the dollar that is alternatively placed in your 401(k) is also relatively illiquid. It isn't easily spendable until retirement (or 59.5, or 55, etc.).
But I can sell bonds in my 401k to buy stocks and vice versa, with no extra cost and within 1 day. Once you apply the money to your mortgage it’s totally out of your control.
delamer
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Re: Paying "early" on mortgage may be unwise

Post by delamer »

The notion that people deliberately make multiple advance payments on their mortgage interests me. Not additional principal payments, but making early payments of their regular monthly mortgage.

I can see it if you pay by check and are going to be traveling on July 1,so you decide to send in your July payment along with your June payment.

And I know that some people mistakenly do so thinking they are saving interest when they are not.

But paying several months in advance because of a fear of unemployment or some other inability to pay in the future? That just seems so illogical to me. And yes, I understand that people aren’t logical about their finances.
Oddball
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Re: Paying "early" on mortgage may be unwise

Post by Oddball »

rkhusky wrote: Thu Mar 28, 2019 2:22 pm
LongRoad wrote: Thu Mar 28, 2019 2:11 pm
To me the issue is liquidity, and I'd agree that a mortgage pre-payment is illiquid because obviously you cannot turn around and spend that same dollar elsewhere. Of course, the dollar that is alternatively placed in your 401(k) is also relatively illiquid. It isn't easily spendable until retirement (or 59.5, or 55, etc.).
But I can sell bonds in my 401k to buy stocks and vice versa, with no extra cost and within 1 day. Once you apply the money to your mortgage it’s totally out of your control.
Selling bonds to buy stocks inside inside a 401k isn't liquidity. Paying your mortgage down and getting a HELOC does allow for some liquidity.
McDougal
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Re: Paying "early" on mortgage may be unwise

Post by McDougal »

LiterallyIronic wrote: 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.
I never considered this. I always pay extra on my mortgage by bill pay with WF. I always designate it as apply to principal. But I never thought "when" to pay the extra. Does it matter when in the month the extra is paid?
POLO
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Re: Paying "early" on mortgage may be unwise

Post by POLO »

Noble Knight wrote: Thu Mar 28, 2019 2:19 pm I still scratch my head that a lot of people on this forum pay off their mortgage early. If I was the richest person in the world I would still get a mortgage with today's rates.
There are people out there who care less about putting every penny they can in stocks and more about not paying the bank $200,000 for a $100,000 house.

Shocking, I know. I think someone may accuse me of Marxism for a sentiment like that.
mariezzz
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Re: Paying "early" on mortgage may be unwise

Post by mariezzz »

The important message of this thread is "know the terms of your loan" (mortgage or otherwise).

However, that's not always the easiest thing to do. Some years ago, I had done a lot of research, and I thought I could get PMI dropped when I reached the 78 LTV ratio by paying down the principal early. In fact, I even had a HUD pamphlet which said this! I discovered when I asked my lender to drop PMI that my understand was wrong. The problem is that even sources that you think should get it correct aren't specific enough with the details. And in this specific case, the language in my mortgage documents (and relevant laws) concerning this was not at all clear to anyone who didn't already know the answer. My loan officer had also provided incorrect information in this regard. I wasn't naive, I didn't fail to try to cover all the bases, I had read every word of my mortgage documents at least twice, and the relevant documents more.

In the end, I refinanced with another lender, got a much lower interest rate (rates had gone down quite a bit), and which was lowered even more because I got a 15 year mortgage. I could have tried getting an appraisal but by that point, I was fed up with the lender - there were other problems at closing (errors, other headaches) which were due to their negligence, so I found another lender.
lazydavid
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Re: Paying "early" on mortgage may be unwise

Post by lazydavid »

willthrill81 wrote: 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.
Paying down principal would have been an even worse strategy for these people, for two reasons:

1) Any extra principal payments are lost liquidity that provide no day-to-day benefit to the mortgage holder until the mortgage is paid off. Even investments that tanked are still worth something, which if the situation is dire can be sold at a loss to continue to make monthly payments and avoid foreclosure. Ask any small business owner--when times are at their worst, liquidity is the only thing that matters. Parked that money in relatively "safe" investments? Congratulations, it didn't get wiped out by the market crash and you get to keep your house!
2) Mortgages with high owner equity are the first to be foreclosed on. The bank only cares about getting their end--the principal you still owe. If you have minimal equity, or worse, are upside-down, they would rather you keep the mortgage, even if you miss a few payments. It will take a long time for them to resort to a foreclosure or short sale, because then they'll be locking in losses. On the contrary, if you had $40k remaining on a home worth $400k before the crash, and the home value falls to $300k, the bank doesn't care. All they have to get is their $40k. Anything else goes to you, and they don't care about you. They are therefore what we call a "highly motivated seller".
Quickfoot wrote: Thu Mar 28, 2019 11:48 am As a side note this is also why paying your mortgage payment 2 weeks early doesn't save you interest. Say your payment is due on the 1st and you make it on the 15th, what you've really effectively done is created a savings account with the lender that 2 weeks later your payment is paid from. Because the payment isn't applied until your due date you don't save interest.

There are a lot of people who truly believe making their payment 1-2 weeks early for 30 years is going to save them interest, unfortunately they are not correct.
Our mortgage is due on the first, and we used to make our payment on the 2nd. We didn't delude ourselves that this saved us money. It provided us a one-month cushion in case something goes wrong, or we had to push it out for some reason. For all intents and purposes, we were making every payment on time, but loaning the bank our final payment for the duration of the loan. Which for our most recent loan turned out to be about 3.5 years (refinanced down to a 15-year). I'm not going to lose sleep about the lost opportunity of that $1050 they got to hang on to for 42 months. On our current loan we haven't bothered to do this. The interest rate on the 30-year mortgage was high enough that we were making extra principal payments, but the current one is at 2.5%, and we will not pay a penny extra ever.
lazydavid
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Re: Paying "early" on mortgage may be unwise

Post by lazydavid »

LiterallyIronic wrote: Thu Mar 28, 2019 1:51 pm LOL. But, no, I don't pay the mortgage with a money order. I just have the teller transfer money from my checking account to my mortgage. The money orders are for my utility bills, which I don't mail either - I drive them to the utility company's office and hand-deliver them. Sorry, USPS. :wink:
You have WAY too much free time on your hands. Consider a hobby. :D
Mako52
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Re: Paying "early" on mortgage may be unwise

Post by Mako52 »

barnaclebob wrote: 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.
I looked at recasting with Wells Fargo extensively and found that it made little sense for us. Our loan maturity was shortened by four years thanks to extra principal payments, but recasting would have taken it back out to the original maturity date. This also would have lead to a higher principal balance (and therefore reduced home equity) at the time we plan to sell our house.

We can refinance our 4.13% rate a 10 year ARM at 3.38%, invest the monthly savings, and come out ahead as long as the annualized return exceeds 3.38%.
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