Mortgage Prepayment Question

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atreat600
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Joined: Tue Dec 11, 2012 5:52 pm

Mortgage Prepayment Question

Post by atreat600 » Thu Oct 12, 2017 4:53 pm

I am strictly curious, and not looking to get into a discussion whether this is prudent or not:

If I were to pre-pay a couple months of my mortgage prior to December 31 2017 (likely the January, February 2018 payments). Would this increase my interest paid for my mortgage interest tax deduction for 2017 calendar year?

Thanks

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samsoes
Posts: 361
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Re: Mortgage Prepayment Question

Post by samsoes » Thu Oct 12, 2017 4:57 pm

atreat600 wrote:
Thu Oct 12, 2017 4:53 pm
I am strictly curious, and not looking to get into a discussion whether this is prudent or not:

If I were to pre-pay a couple months of my mortgage prior to December 31 2017 (likely the January, February 2018 payments). Would this increase my interest paid for my mortgage interest tax deduction for 2017 calendar year?

Thanks
No, interest accrues daily. Any payment (regular or prepayment) pays off accrued interest first, and the remainder is applied to principal. The only interest you pay is what has accrued.

So if your regular payment is $1000 and the accrued interest is $750, you only pay $750 in interest if you pay the $1000 or if you pay $5000.

A lower principal in turns reduces the daily interest accrual ever so slightly, and so on.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

JBTX
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Re: Mortgage Prepayment Question

Post by JBTX » Thu Oct 12, 2017 5:11 pm

You could prepay your January but not beyond that.

http://www.bankrate.com/finance/taxes/c ... ent-1.aspx

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samsoes
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Re: Mortgage Prepayment Question

Post by samsoes » Thu Oct 12, 2017 5:18 pm

JBTX wrote:
Thu Oct 12, 2017 5:11 pm
You could prepay your January but not beyond that.

http://www.bankrate.com/finance/taxes/c ... ent-1.aspx
The January 1st payment pays the interest which has already accrued throughout December.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

JBTX
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Re: Mortgage Prepayment Question

Post by JBTX » Thu Oct 12, 2017 5:31 pm

samsoes wrote:
Thu Oct 12, 2017 5:18 pm
JBTX wrote:
Thu Oct 12, 2017 5:11 pm
You could prepay your January but not beyond that.

http://www.bankrate.com/finance/taxes/c ... ent-1.aspx
The January 1st payment pays the interest which has already accrued throughout December.
But taxes are on a cash payments basis so I would assume you are typically paying for December - November interest. If you paid January mortgage payment early you would be paying December - December or 13 months interest, correct?

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samsoes
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Re: Mortgage Prepayment Question

Post by samsoes » Thu Oct 12, 2017 6:02 pm

JBTX wrote:
Thu Oct 12, 2017 5:31 pm
samsoes wrote:
Thu Oct 12, 2017 5:18 pm
JBTX wrote:
Thu Oct 12, 2017 5:11 pm
You could prepay your January but not beyond that.

http://www.bankrate.com/finance/taxes/c ... ent-1.aspx
The January 1st payment pays the interest which has already accrued throughout December.
But taxes are on a cash payments basis so I would assume you are typically paying for December - November interest. If you paid January mortgage payment early you would be paying December - December or 13 months interest, correct?
If you made the Jan 1 payment in January of this year, and the next Jan 1 payment in late December, you'd have paid 13 months interest this year, correct, all of which is deductible for this year.

Since it had already accrued and was paid this year, you can deduct it this year even if last January's payment (which was paid in January) paid the interest accrued the December prior. When accrued interest was actually paid determines if it's deductible this year or next.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

goingup
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Re: Mortgage Prepayment Question

Post by goingup » Thu Oct 12, 2017 6:18 pm

I pay the January payment in December and deduct that interest paid. I don't think you can pay beyond that. We also pay both property tax installments in the current year for the deduction. (This is possible if you don't escrow property tax.)

cal91
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Re: Mortgage Prepayment Question

Post by cal91 » Thu Oct 12, 2017 6:27 pm

Does paying off principal reduce your monthly amount, so a 30 year mortgage stays at a 30 year mortgage?

Or does it reduce your time horizon. (Your payments are still the same, but your time horizon is shortened)

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samsoes
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Re: Mortgage Prepayment Question

Post by samsoes » Thu Oct 12, 2017 6:40 pm

cal91 wrote:
Thu Oct 12, 2017 6:27 pm
Does paying off principal reduce your monthly amount, so a 30 year mortgage stays at a 30 year mortgage?

Or does it reduce your time horizon. (Your payments are still the same, but your time horizon is shortened)
Typically, it reduces your time horizon.

However, upon request, some banks will "re-cast" your mortgage for a fee ( ~$300), reducing the monthly payments while preserving the original 30-year timeline.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

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