Increasing extra mortgage payments later in the term worth it?

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wafflesngravy
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Increasing extra mortgage payments later in the term worth it?

Post by wafflesngravy » Mon Aug 19, 2019 11:11 am

Hey guys, I want to knock out my mortgage, but when I increased my monthly payments the bank said it was only going to knock about 6 months off. Now I'm wondering if its worth it? I also wonder if the lady on the phone could have been wrong, or if this sounds right to you. They're going to send me a letter with the changes and maybe it will clear some things up.

So to sum this up, the original loan was 102,000 for 20 years, 3.625% and the loan started April 2013. I've made bi-weekly payments since day one, which should equal one extra payment per year. I've also added an extra $50 biweekly toward principal since nearly the beginning. A few months after start. So now I want to start spending an extra $250 biweekly toward principal and thats when she said congrats you took 6 months off and the loan will be paid off mid 2024. Does that sound right? 6 months?

I've tried every online and excel mortgage calculator I can find and none of them are adding up properly. I'm down to 62,000 owed and most of the calcs seem to think I should still owe 68,000. So they are not helping much at all and I'm not sure why. I even went through bank statements to verify exactly when I started paying extra to make sure it was accurate. But most of these are not setup for biweekly payments so maybe that throws them off. So does 500 a month really only take off a few months being later in the loan like this?

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CAsage
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Re: Increasing extra mortgage payments later in the term worth it?

Post by CAsage » Mon Aug 19, 2019 1:52 pm

You should note that interest is only calculated monthly, so it would be based on the amount you owed on (probably the 1st or 30th) whatever date it's calculated. So the bi-monthly payment won't reduce the interest for those two weeks (as in, it will count and calculate just like a monthly double-payment). Can you exactly determine your current balance based on your most recent statement and then someone could check the math? What you think you owed is probably not important; it's their statement that will count.
The real discriminator on paying off a loan is simply - can you do better than the mortgage rate with your alternate investment or savings? I hope you aren't paying a service for that bimonthly payment... it's just as effective to make the monthly payment bigger!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

mhalley
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Re: Increasing extra mortgage payments later in the term worth it?

Post by mhalley » Mon Aug 19, 2019 2:05 pm

Don’t look at it as taking months off the loan, look at it as how much interest you save. Certainly extra payments make a much bigger difference at the beginning of the loan, as you are saving 29 years of interest on that amount. At the end of the loan, much more of the payment is going towards principal, so it will have much less of an effect as far as cutting months off.

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willthrill81
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Re: Increasing extra mortgage payments later in the term worth it?

Post by willthrill81 » Mon Aug 19, 2019 2:42 pm

The reason that you reduce your total interest paid more if you make additional principal payments early in the mortgage term is simply because they have more time to compound in your favor.

For instance, a $100 principal payment compounded at 3.625% for 25 years is $247.16 (savings, in this instance). Compounded for 5 years, it's $119.84.
“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

Miguelito
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Re: Increasing extra mortgage payments later in the term worth it?

Post by Miguelito » Mon Aug 19, 2019 2:45 pm

I typically round up my payment to the nearest $50 or $100. I don;t notice it at all (admittedly, it's a big, 15-year loan payment) and I've already shaved one month.

HomeStretch
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Re: Increasing extra mortgage payments later in the term worth it?

Post by HomeStretch » Mon Aug 19, 2019 3:51 pm

You can set up an amortization table for your mortgage in Excel. I used one years ago to help me understand the impact of extra principal payments on the mortgage term. I also used the excel sheet to verify the interest reported to me each year for tax purposes.

mortfree
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Re: Increasing extra mortgage payments later in the term worth it?

Post by mortfree » Mon Aug 19, 2019 5:43 pm

Bi-weekly payments aren’t as great as they seem.

Pay monthly and apply extra

Admiral
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Re: Increasing extra mortgage payments later in the term worth it?

Post by Admiral » Mon Aug 19, 2019 6:27 pm

This spreadsheet from Microsoft will show you exactly what each prepayment will do to your loan. To the penny. Make sure you enter the starting values exactly. You can "add" prepayments to any future month to see the result.

https://templates.office.com/en-us/loan ... tm03986974

Iridium
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Re: Increasing extra mortgage payments later in the term worth it?

Post by Iridium » Mon Aug 19, 2019 7:06 pm

wafflesngravy wrote:
Mon Aug 19, 2019 11:11 am
So to sum this up, the original loan was 102,000 for 20 years, 3.625% and the loan started April 2013. I've made bi-weekly payments since day one, which should equal one extra payment per year. I've also added an extra $50 biweekly toward principal since nearly the beginning. A few months after start. So now I want to start spending an extra $250 biweekly toward principal and thats when she said congrats you took 6 months off and the loan will be paid off mid 2024. Does that sound right? 6 months?
I think you are misinterpreting the bank. Let's start with your question: Every dollar extra you pay now should decrease the amount you have to pay on the loan later by a dollar plus a bit to reflect saved interest. My calculation is that your loan has a payment of $598 / month and if you are putting an extra $500 / month toward the loan, then your loan will be paid off nearly a month earlier for every month that you stay on that program.

At far as what I suspect the bank meant: As of this moment in time, your loan is due to be paid off 6 months early. That is assuming that you only make the minimum payment from here on out (payoff dates are pretty much always computed based on minimum payments, unless a calculation is specially made otherwise). This makes some level of sense in that you have been making one extra payment per year and the loan is about 6 years old. Yes, with the interest savings, I would have expected it to save you 7 or 8 payments, but we are doing this math on the back of a napkin, so close enough.

In response to your inquiry, the bank also informed you that your loan would be paid off in mid 2024 if you followed your plan to add $500 / month extra to your payment. If you did not follow this plan, your loan would be paid off in November 2032, so you are taking about 8 years off the loan with this plan. That is in addition to the 6 months you have already sliced off by making biweekly payments for the last 6 years.

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grabiner
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Re: Increasing extra mortgage payments later in the term worth it?

Post by grabiner » Mon Aug 19, 2019 7:33 pm

willthrill81 wrote:
Mon Aug 19, 2019 2:42 pm
The reason that you reduce your total interest paid more if you make additional principal payments early in the mortgage term is simply because they have more time to compound in your favor.

For instance, a $100 principal payment compounded at 3.625% for 25 years is $247.16 (savings, in this instance). Compounded for 5 years, it's $119.84.
And the 5-year payment is no worse, because you can invest that 5-year payment for the next 20 years to get a lot more money after the 25-year term.

The term effect is the same phenomenon. If your mortgage payment is $1000 per month at 3.625%, then paying an extra $5000 with 5 years left on the mortgage shortens the term by 6 months because it saves you about $6000, while paying it with 25 years left on the mortgage shortens the term by 12 months because it saves you about $12,000. But saving $6000 5 years from now and saving $12,000 25 years from now may be of comparable value. (For example, you could buy a EE bond 5 years from now for $6000, and cash it in for $12,000 25 years from now; EE bonds are guaranteed to double in value in 20 years.)
Wiki David Grabiner

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