For example, your mortgage is 3000 per month. 

If you pay 1500 two times a month, you will shave 7 years off of the life of your loan.  Is there truth to that? 

What are some other ideas for shaving time off of the loan?  What are your opinions on these types of methods? (ex. paying over the top of your mortgage)

gwailo168 - 19 July 2008 09:12 AM

For example, your mortgage is 3000 per month. 

If you pay 1500 two times a month, you will shave 7 years off of the life of your loan.  Is there truth to that? 

What are some other ideas for shaving time off of the loan?  What are your opinions on these types of methods? (ex. paying over the top of your mortgage)

Slight correction - every two weeks, not 2x per month.

$3,000x12months = $36,000/yr
$1,500x26payments = $39,000/yr

Essentially you are prepaying $3000 in prin every year.  You can add $250 to each monthly payment and make the same change.

Yes, gwailo.  Paying 1 extra mortgage payment per year cuts just about 7 years off of the 30.

So if your mortgage is 3000K a year, every month pay 250 more. (3000 divided by 12 = 250)

Thanks for the info

How common is this type of practice?  It seems like paying 1/2 of the mortgage with an additional 125 dollars will cut off a substantial amount of the loan.

But don’t do it that way.

I had a client who tried that and the computer program of the
lender couldn’t handle it, and they ended up in foreclosure, and
had to pay me a bunch of money to straighten it all up.  Figure out what the
increased payment amount would be and add that to your regular
monthly payment.

Or, just add an extra 100 or 200 a month and watch your principal
sink like a stone.  Also, it doesn’t hurt to check the bank’s math against
an amortization table to make sure they are getting it right.  The degree
of incompetence involved in banking is staggering.  Also, if you have
an adjustible mtg, this will not shorten the term of your mtg, but your
payment will go down from what it otherwise would have been (meaning it
might go up but will go up less than it would have without that monthly
payment.).

As a rule of thumb, you take 25 years to pay half of the principal, and the
last 5 years to pay the other half.  So prepayments in the first 5-10 years
of a loan really shorten the term fast with a fixed rate loan.  Higher rates take
more time, say 25 1/2 years to get to the half way mark.  Really low rates
get you to the halfway mark faster, but not that much faster, say 24-24 1/2
years.

gwailo168 - 19 July 2008 09:36 AM

Thanks for the info

How common is this type of practice?  It seems like paying 1/2 of the mortgage with an additional 125 dollars will cut off a substantial amount of the loan.

It’s very deceiving to just look at what you save.  The money you spend early on costs more than the money you save at the end because of the time value of money, and inflation plays a big role.  If inflation goes up above your locked-in mortgage rate it probably makes more sense to make the minimum fixed payment.  E.g., if inflation is at 10% a $3000 fixed payment will feel like a $1200 payment in 10 years, but it’ll still feel like a $2700 payment next year.  Of course house prices are also affected by inflation .

Here is an extra payment calculator to play with. Plus, there is a bunch of info and more calculators on that site.

Daedelus is right of course—-mathematically.

Psychologically he’s not right.

Getting out of debt is a really good thing to do.

Do you have the discipline to put the money you would have
paid on the mtg in a savings account. . . and just leave it
there?  I sure don’t.  My clients doubly sure don’t!!

Not to speak of if the unthinkable happens and your bank goes down
and FDIC doesn’t ride to the rescue, and your money is gone.

It is better for debt to be gone.  It is really really nice to have
a paid for house.

lawyerliz - 19 July 2008 09:38 AM

But don’t do it that way.

I had a client who tried that and the computer program of the
lender couldn’t handle it, and they ended up in foreclosure, and
had to pay me a bunch of money to straighten it all up.  Figure out what the
increased payment amount would be and add that to your regular
monthly payment.

Or, just add an extra 100 or 200 a month and watch your principal
sink like a stone.  Also, it doesn’t hurt to check the bank’s math against
an amortization table to make sure they are getting it right.  The degree
of incompetence involved in banking is staggering.  Also, if you have
an adjustible mtg, this will not shorten the term of your mtg, but your
payment will go down from what it otherwise would have been (meaning it
might go up but will go up less than it would have without that monthly
payment.).

As a rule of thumb, you take 25 years to pay half of the principal, and the
last 5 years to pay the other half.  So prepayments in the first 5-10 years
of a loan really shorten the term fast with a fixed rate loan.  Higher rates take
more time, say 25 1/2 years to get to the half way mark.  Really low rates
get you to the halfway mark faster, but not that much faster, say 24-24 1/2
years.

When we owned a house, our mortgage was sold so many times that I can’t even
remember what banks we had. It felt like it was sold every other year or so.
Some banks let us pay 2x per month, while other banks said their software couldn’t
handle the extra payment. 
 
I agree with Liz - make the extra principal payment each month instead of the
extra mortgage per year.  It will be easier to track for you and the bank.

gwailo168 - 19 July 2008 09:12 AM

For example, your mortgage is 3000 per month. 

If you pay 1500 two times a month, you will shave 7 years off of the life of your loan.  Is there truth to that? 

What are some other ideas for shaving time off of the loan?  What are your opinions on these types of methods? (ex. paying over the top of your mortgage)

Wells Fargo used to offer a mortgage like that.  Now I can’t find anyone who offers those kind of repayment terms as a part of the loan agreement.  It’s possible that I haven’t looked hard enough.