[BigS]

I keep hearing that you can actually pay off your 30year loan in less time. I also heard that if you pay extra on your principal each month you can do it. Is this true? How can I pay off my loan without getting broke.:confused:

[CaptainForest]

I believe it is that if you make 1 extra mortgage payment a year, you can have your entire loan paid off in 22 years, rather than 30.

If you can't afford the extra payments, then don't worry.

Just make your monthly payments every month.

[Nosnosna]

Simply pay more than your monthly payment. Every bit helps on that, and the earlier you can make some extra payments to principal, the more effective it is.

Before putting much into early repayment, you have to figure out if it's worth doing... there's little benefit to paying a loan like this down early at the expense of your savings. The money you spend there is money that you may have to borrow elsewhere to fix your car in a few months. It's often a better choice to spend the money on home improvements rather than paying down the mortgage... this increases the value of the property.

Also, a mortgage should be one of the last places you pay extra into... the interest rate on it is going to be lower than your short-term debt (credit cards especially) in most cases, so you'll want to pay any of those off first.

[ScottGem]

If you have a spreadsheet program you can create an amortization schedule and calculate how much more a Monthly payment will reduce your term by how much.

The 30 year term is calculated by amortizing the loan. This calculates the amount of interest due on the principal each month. By paying more prinicpal each payment you reduce the amount of interest due. And that reduces the term of the loan.

[Fr_Chuck]

The over all interest is based off the current balance, so paying additional each month or each year will reduce the next years interest basis. It allows you to lower the principle which lowers interest to principle ratio much more quick.

There are various ways to do it, take your monthly payment, divide by 4 and pay that amount each week, that will add one full payment a year, plus if you are doing this ahead starting the week after a full payment, it actually has the next months payment paid slightly ahead and on some loans will help.

But if you can pay more at other times, it will pay it off even sooner.

** not all loans have and allow this, but most should

[scglove]

I keep hearing that you can actually pay off your 30year loan in less time. I also heard that if you pay extra on your principal each month you can do it. Is this true? How can I pay off my loan without getting broke.:confused:

This is true I am a mortgage lo. You need to first contact you mortgage holder, instead of doing what some folks suggest by dividing the mortgage payment by twelve months and adding the different amount to each monthly payment may put you over . See if you may can just get a fifteen year mortgage, twenty year. Who knows

[Fr_Chuck]

I would say perhaps not, since if they get you a new loan, you will first have set payments that are higher that you will be tied into.

Next once they will change you fees, points to get a new mortgage, why pay a lot of fees if it just is not needed. ( but check your mortgage to be sure it can work)

And many of the mortgage companies will want you to pay a fee to allow this service, and unless the fee is in the mortgage agreement it is not required

Nothing wrong with a 15 year mortgage, I perfer them myself but before you jump into a new loan, make sure what your loan costs will be also.

[excon]

Hello Big:

IF you do pay extra each month, or it you send in any extra payments, MAKE SURE that the processor applies the extra money to principal. Many don't.

excon

[ScottGem]

Yes, before you decide to pay any additional principal, you do need to take to your lender. But most will take any amount over the interest due and apply that to prinicpal.

I do NOT agree with trying to change the term. Changing the term usually means refinancing the loan. That means additional costs. Unless you have a high interest loan, this doesn't make any sense. You lose flexibility. If you just pay an extra payment per year or make weekly payments or just add a specific amount, you have flexibility on the extra amount you want to pay or even if you have to pay it. Money tight that month? Just make your regular payment. Refinancing or just changing the term (if possible) removes your flexibility.

[Bobak]

There are a few things you want to keep in mind when calculating how to pay off your home as fast as possible.
First, when you're in a fully amortized program (principal + interest), you have to understand that the bank collects interest in advance. This is the reason why most of your payments for the first 15-20 years is going to be interest with a little bit of principal paid off every month.
Second, if you are in your loan for lets say 8 years, then the rates drop, you will think "if i refinance into a lower rate, i can probably pay off my loan faster". WRONG! By refinancing after eight years, you start the clock over again and now you're pre-paying interest for the first 15-20 years again. It's a vicious cycle that a lot of people get stuck in this way.
Finally, you have to keep in mind the amount of money you lose by not doing something else with it. If you pay off your home eventually in 20-30 years, you have been putting all that money into it and losing the opportunity to put that money to better use. It may add up, but with inflation your 500,000 will not have the buying power 30 years from now that it does today.
Your best bet is to have a professional evaluate your specific situation and give you different options and discuss the good and bad side to each option. Be careful because there are a lot of crooks out there these days and you may end up in a program that doesn't achieve what you are looking to do. You can always contact me for any questions after speaking with your mortgage officer or if you would like to be referred to a reliable person, I can do that for you also.

[ScottGem]

there are a few things you want to keep in mind when calculating how to pay off your home as fast as possible.
first, when you're in a fully amortized program (principal + interest), you have to understand that the bank collects interest in advance. This is the reason why most of your payments for the first 15-20 years is going to be interest with a little bit of principal payed off every month.
second, if you are in your loan for lets say 8 years, then the rates drop, you will think "if i refinance into a lower rate, i can probably pay off my loan faster". WRONG! by refinancing after eight years, you start the clock over again and now you're pre-paying interest for the first 15-20 years again. It's a vicious cycle that a lot of people get stuck in this way.
Finally, you have to keep in mind the amount of money you lose by not doing something else with it. if you pay off your home eventually in 20-30 years, you have been putting all that money into it and losing the opportunity to put that money to better use. it may add up, but with inflation your 500,000 will not have the buying power 30 years from now that it does today.
your best bet is to have a professional evaluate your specific situation and give you different options and discuss the good and bad side to each option. Be careful because there are a lot of crooks out there these days and you may end up in a program that doesn't achieve what you are looking to do. you can always contact me for any questions after speaking with your mortgage officer or if you would like to be referred to a reliable person, I can do that for you also.

There are several points of inaccuracy and disagreement here.

First, Loans do NOT "pre-pay" interest. It is true that, at the beginning of the loan, the interest portion of the payment is higher. But that's because the outstanding balance is higher, not because of any prepayment of interest. That's what amortization does, it calculates the a payment over the term so that interest is taken out of each payment on a declining basis as the balance is reduced. This is why (as was explained earlier) you can pay off the loan early by just increasing the amount of prinicpal you pay. Doing so reduces the outstanding balance, making the interest portion smaller.

Second, its also not true that a refinance "starts the clock over again". How you do this depends on your balance and term. For example; If you started with a $100K loan at 7.5% and just made regular monthly payments ($699.21), after 8 years, your principal balance would be $90,278.26. Now lets say you refinanced for for 20 years at 5%, assuming you folded in closing costs so you refinanced $91K. Your payments would now be $600.56 and you would have shaved 2 years off the term.

Third, while its true that the money you are paying into your mortgage could be at work elsewhere, real estate has stood up well against other investments. You also have to factor in the tax benefits and the fact that you are getting a value (use of the property) during the time. Also, eventually your mortgage will be paid off and you will then own something.

I've attached an Excel spreadsheet that does these calculations. There is also a Supplemental Payment amount that you can add to see how much sooner you can pay off the loan by adding an additional Prinicpal payment.

[Bobak]

I can see where scott gem is coming from with his argument but I disagree. An amortization schedule is set up so that you pay a majority of interest in the early years. It does not have to do with the amount owed and can be proved with one simple procedure. Divide the amount of principal paid by the total amount paid each month. This way you can see that the percentage of principal paid increases over time. It is a common misconception that because the loan amount is decreased, the interest is decreasing.
Once you refinance, your amortization schedule will begin from the very end once again, so if you compare the principal paid to the total paid, you will see that it consists of a very low percentage.
Third, as far as the tax benefits... you only benefit from interest and property taxes on a home you live in. paying your principal does not help you with tax deductions.

[KMSRyana]

I keep hearing that you can actually pay off your 30year loan in less time. I also heard that if you pay extra on your principal each month you can do it. Is this true? How can I pay off my loan without getting broke.:confused:

The answer to part one of your question is YES, you can pay it off in less time. This has turned into a bigger argument than it should have BigS. It's because there are so many different ways, methods and views on HOW to do it.

I would start by talking with your current lender. Ask them if they allow you to pay extra on the principal and if you have to do anything special like attaching a note asking them to apply the extra to the principal, they will tell you their rules. Also ask them if you can pay early. If you can, paying them every week or two weeks instead of once a month will help you. Remember that interest acrues daily on most loans, so when they get half the money 2 weeks early on a consistent basis, they charge less interest.

The second part of your question, about doing so without going broke... well know your limits and set a plan. Stay consistent. Say you pay $50 or $100 extra each month, and your lender does allow you to pay early and you start paying it every two weeks... Whatever you do, stay consistent with your plan, stay within your means, and you'll be fine.


Good luck.

[ScottGem]

I can see where scott gem is coming from with his arguement but i disagree. an amortization schedule is set up so that you pay a majority of interest in the early years. it does not have to do with the amount owed and can be proved with one simple procedure. divide the amount of principal paid by the total amount paid each month. this way you can see that the percentage of principal paid increases over time. It is a common misconception that because the loan amount is decreased, the interest is decreasing.
Once you refinance, your amortization schedule will begin from the very end once again, so if you compare the principal paid to the total paid, you will see that it consists of a very low percentage.
Third, as far as the tax benefits....you only benefit from interest and property taxes on a home you live in. paying your principal does not help you with tax deductions.

Do you even have a clue how an amortization schedule is created? It doesn't seem so from your answers here. To enlighten you, an amortization scheduled is created by figuring out the amount of interest due on the outstanding balance each month. Look at the spreadsheet I attached. The calculation for the interest portion of the payment is Balance*(rate/12).

Yes its true that an "an amortization schedule is set up so that you pay a majority of interest in the early years". But the reason for that is that the balance on which the interest is calculated is higher during the earlier part of the loan. Less of the payment goes towards prinicpal. As payments are made, the balance goes down and so does the interest portion. It has EVERYTHING to do with the balance. I don't even understand what you claim is proof. Of course the percentage of principal paid increases. Your payments remain the same (unless the rate changes), so as the interest amount decreases, the amount that goes to prinicpal increases.

"It is a common misconception that because the loan amount is decreased, the interest is decreasing." That's not a misconception that is verifiable fact. Look at ANY amortization schedule. The schedule will generally have 5 columns; Pmt#, Pmt, Interest, Principal & Balance. Below is the first 12 payments of a $100K, 30 yr Loan at 6%. As anyone can clearly see, with each payment, the portion attributable towards interest decreases as the portion attributable towards prinicpal increases. The interest rate doesn't change, but because the balance is being reduced, the interest portion gets reduced.

Pmt# _ Payment _ Interest _ Principal ___ Balance
1 ........... $599.55 ...$500.00 ...... $99.55 .. $99,900.45
2 ............$599.55 ...$499.50 .....$100.05 ...$99,800.40
3 ............$599.55 ...$499.00 .....$100.55 ...$99,699.85
4 ............$599.55 ...$498.50 .....$101.05 ...$99,598.80
5 ............$599.55 ...$497.99 .....$101.56 ...$99,497.24
6 ............$599.55 ...$497.49 .....$102.06 ...$99,395.18
7 ............$599.55 ...$496.98 .....$102.57 ...$99,292.61
8 ............$599.55 ...$496.46 .....$103.09 ...$99,189.52
9 ............$599.55 ...$495.95 .....$103.60 ...$99,085.92
10 ..........$599.55 ...$495.43 .....$104.12 ...$98,981.79
11 ..........$599.55 ...$494.91 .....$104.64 ...$98,877.15
12 ..........$599.55 ...$494.39 .....$105.16 ...$98,771.99

As for the refinance issue, look at the numbers I quoted in my previous note. In the last payment of that 30 yr, $100K loan at 7.5% the payment breakdown was $565.08 Interest and $134.14 Principal leaving the balance of $90,278.26. In the first payment of the new loan ($91K for 20 yrs @ 5%) The breakdown is $379.17 Interest and $221.39 Prinicpal.

Those are cold, hard, irrefutable facts!!

Finally, I didn't say that paying the principal helps with taxes. In fact it hurts, because it reduces the amount of interest paid, thereby reducing your deductions. But that wasn't the point I was making. The point is that the tax deductibility of a mortgage and property taxes helps offset the investment gain you might get elsewhere. And yes these benefits are only for a residence, not an investment. But that's what the OP is asking about.

I've seen several of your other answers and you have given mostly good advice, but your answers here are DEAD wrong. Its not a matter of disagreement, it's a matter that you have your facts wrong.

[Bobak]

Haha, the funny thing is that you look at an amortization schedule and take it for fact without analyzing it. You argue that interest is not collected in advance, but then come back and say "yes it is true that a majority of the interest is paid in the early years". You say that there are tax benefits in paying the loan down, then say "that you mean it actually hurts". And you also act as if a loan recasts on a monthly basis. With all fixed loans that I've sold and had on my properties, ou are paying interest based on the loan amount, and not the balance due. Only time that what you say is true is when there is a clause in the loan allowing it to recast on a monthly basis. It might be that we are talking about two different types of loans because what you say doesn't make sense to me and vice versa. If you like, we can discuss it via email rather than on here.

[ScottGem]

What's funny is you don't seem to read what I'm saying. You seem to be viewing amortization from some angle that no one else in the industry does. And you refuse to entertain the fact that you are wrong. I can see it doesn't make sense to you, I just don't understand why since the figures tell the exact story.

You initially stated that "bank collects interest in advance". But that statement is not true. For that statement to be true, the bank would have to collect more than the interest due. I agreed that the majority of interest is paid in the beginning of the loan, what I disagreed with is the reason why. Youjr reasons are wrong. As my figures show, as EVERY amortization schedule shows, a loan payment is split between a principal portion and an interest portion. That split starts heavily weighted towards interest because the outstanding balance of the loan is high. As the payments are made the balance is reduced and the balance of the split changes. The prinicpal portion increases and the interest portion decreases. The function of an amortization schedule is calculate those splits over the life of the loan given payments accoirding to the schedule. Nothing is "recast", this is what the schedule calculates. Once more; THE INTEREST PORTION OF EACH PAYMENT IS CALCULATED ON THE OUTSTANDING PRINICPAL BALANCE!! Again, download the spreadsheet I attached. I didn't create that schedule, it's a template included with Excel. Check out this site: Amortization Schedules, the formulas for calculating amortization schedules are pretty set in stone.

Almost all loans are amortized. Maybe a loan that is not amortized might have different terms. Bu every amortzed loan works they way I have said.

I didn't say there were "tax benefits in paying the loan down". I said there were tax benefits in having a mortgage and owning a home. That was to counter your bad advice about keeping in mind the "amount of money you lose by not doing something else with it".

I've given you the actual figures. I've given you references to prove what I've said. Please stop given people the wrong info.