DawgTalkers.net Forums DawgTalk Everything Else... Mortgage Question - How to reduce years?

My wife and I have a house and a rental condo, we're attempting to pay them off faster, but we're debating on which process is faster/better.

Option 1 - (Pay additional Principal) - Pay the minimum amount due but add extra into the principal box ($400/month) for 12 payments a year.
Option 2 - (Make a higher payment) - Divide the monthly payment by 12 and pay that extra per month, not in the principal box for 12 payments a year.
Option 3 - (Make bi-weekly payments) - Divide the monthly payment by 2 and pay that amount every two weeks. There will be 2 months a year you'll make 3 payments.

Ultimately, maybe they all do about the same thing. Heck, there may even be a 4th option I'm missing.

Anyway, I contend adding in principal per month is the best bet. For option #3, you'd be paying extra interest for those two payments, wouldn't it be better to pay it all towards principal?

I ask because we have that rental unit that we don't really know when and if we'll ever sell. It's worth $300-325 in today's market and we owe $200. We've been operating on a variable rate mortgage at 5%, but that's going to jump up in September with the potential rate hike. Soooooo, do we re-fi with a 15, 20 or 30 to lock in a 4.75, 4.85 or 5% rate? If we convert to a 30-year, the monthly principal drops a lot, giving us flexibility if something were to happen, but the standard plan would pay extra into the principal.

Maybe I'm not providing enough detail of the situation, and that might not matter, I guess the high-level question still remains, to pay a mortgage off faster, what's the best method?

Here is a link to a loan amortization excel spreadsheet that you can download and it should allow you to input all of your various scenarios.

Hopefully it works for you.

https://www.vertex42.com/ExcelTemplates/loan-amortization-schedule.html

I basically did #1, but made sure I wrote "apply extra to principal" on every check to make sure that's what happened.

Make extra payments every month on the principal. If you have a windfall; come up with some extra cash - whether by bonus from your jobs, inheritance, or a successful trip to Vegas - put at least some of it into your mortgage. Go for the shortest term loan - 15 years if you can swing it - whenever possible. Pay it off sooner if you can. Loan interest is your enemy; extra payments on principal reduce interest - therefore, they are your friend,

I'm not a financial expert, but that is what we did when we had 3 houses. Pay on the principal. And like you said, anytime you get extra money, throw it at that principal.

Of course, I'm just a dummy and someone might come along and say that is a stupid strategy. It's just what I did and I am not claiming to be an expert on the matter.

Thanks for the advice guys (and gal).

We've been paying $300-500 extra per month in the principal box since we bought this current house (almost two years). By my estimation, it should knock the mortgage length by 33%. I just wanted to make sure I wasn't doing it wrong.

For our rental property, we seem like we're trapped by indecision. Do we re-fi into a 15-year, raise the monthly to pay it off faster, but the monthly rent won't cover what we get.......but, if we can afford it, it's like us paying into ourselves. The problem would be, if something hit our incomes, we'd be locked into that higher amount. I sort of want to re-fi into a 30-year, but continue paying the higher principal and if anything were to happen, we'd have $500 of leeway.

Maybe it doesn't matter if we sell the unit after our tenant's current lease is up in 2 years. It would be cool if we can keep it, pay it off and have that as additional income every month when we're retired.

Principal, principal, PRINCIPAL. You're doing the right thing ~ keep it up. By-weekly payments and other "schemes" are nothing more than gimmicks unless all of the surplus payment is going toward the principal. If your goals are clear, the loan length doesn't even matter. Set a goal and stay true, you might find it's contagious bro. It was so contagious for my wife and I that we paid off our first house in under seven years. After living mortgage free for five years, our next house was purchased mortgage free.

I'm part of the "Pay down your principal" crowd.

We took a 30 year fixed. Bought a house that was half as expensive as we were qualified to purchase. Paid extra on the princ every month (the amount varied, based on current surplus household cash. Usually 75-150) Paid it off entirely in 20yrs/1mo.

Paying down the principal is the fastest, most efficient way to get debt-free. We do it with credit cards, too.

Here's a question, what's your interest rate? if you're around 3.75-4% (or less) why pay off early? It's practically free money. You're leveraging the balance and the bank is carrying the load while your properties appreciate. Take your extra money and invest it - that's what the bank would do with your money anyway At some point of your choosing in the future, you should have enough to pay off the balances (if you really wanted to) plus extra to do with as you will. But at low interest rates, it makes sense to carry the loan to term and invest your extra money for higher returns. Just a thought.

Not a bad idea in a normal market. Today’s market is overvalued and the likelihood of a downturn is looming. In my opinion keep paying extra on your principal. When the bottom of the market drops out then consider investing.
JMHO

Too add, depending on the amount of mortgage you have, even at 3.625% (which is my interest rate), the interest adds up quickly. Very quickly. I’m paying an extra $300+ a month on my mortgage. We took out a 30 year loan at 3.625%, rather than a 15 year at 3.25% as we wanted to keep the lower payment option open for times of need. As it is, with the extra we’re paying, we’re paying the loan off in 15 years. Over the course of our loan the interest we’ll have paid would be basically a wash, maybe even slightly less, than with the 15 year mortgage.

We’re on pace to be paid off in about 8 more years. Any side income I make through my art goes toward the mortgage too. At least most of it. If things keep picking up in that realm I could be out from under my mortgage sooner. Once that happens my monthly financial needs would drop by 50% plus. Freeing me up to pursue my art further. Maybe freeing me from my career as a nurse.
Dreams.
Until then, goals. Get the house paid off.

Good luck.

One issue with bi-weekly payments, if your lender is not set up for them, you better make sure your bank will accept this method. You could actually become delinquent thinking you are paid ahead. Also this was meant for Punchsmack but replied because you addressed the bi-weekly option.

JC

A lot depends on your mortgage balance, financial situation and actual goals. Punchsmack added a rental into the mix as well. Rentals make you money while living in a house makes you none. Some advise not paying off rentals because they pay for themselves and offer tax advantages, particularly depreciation. To take full advantage of those, especially if you intend to possess more rental properties, setting up a property management LLC could open up a world of tax advantages... then we get into your age, income you need to offset, etc...

It's always a vicious circle, but as Portland said, I wouldn't invest rather than pay down in this market, unless you were already past the steep part of the "mortgage interest curve" as you are not getting any of that back anyway.

First and foremost everyone needs to do what is right for them. So your situation may be right for you.

Having said that, counting on a downturn in the market, or trying to predict the market either way is a loser's game. Historically it rises. Also, the market just had a pretty substantial correction, and the economy is healthy. At this point the only reason to fear a down turn, IMO, is because of all the fear mongering by self-proclaimed experts. A steady investment strategy in a few solid, high growth companies is a solid strategy no matter what the market is doing if you're in it for the long haul. In fact, occasional downturns, which are healthy, allow the investor to dollar cost average.

Take the simplest of situations, say you want to pay $300 extra per month toward your mortgage of 200,000.00 on a 30 year loan @ 3.75%. You would pay your mortgage off in about 20 years, with a savings of about $53,000.00.

Instead, say you invested that same $300/mth and received a low average annual return of 5%, compounded once annually, you would have $81,566.97 at the end of 15 years, and about $125,000 at the end of 20 years. And this doesn't even take into account more frequent compounding or the potentially higher rates associated with a good investment.

Like I said, everyone needs to do what is right for them, but in general leveraging money through a low interest loan is smart business.

Sure. I think a big part of the decision is age. How many working years do you have left? If you’re 27 years old with a 30 year mortgage all is good. If you’re 47 with a 30 year.... might want to get it paid quicker. Same with playing the market.

Absolutely. Time is the ultimate enemy.

The expression on the check should be "balance to principal", however anything written in the memo section is non-binding.

If you want to put a binding agreement on a check, on the back, where the recipient signs, you put "the negotiation of this check is conditional upon yadda yadda.

Interest is figured on an annual rate. It has nothing whatsoever to do with the number of payments you make.

You pay extra money against principal to reduce the total cost and time of a loan. You need to read the actual loan agreement and consult local and state laws to determine in exactly what manner extra payments are applied, and on what schedule. Keep your money earning interest in your bank until it will reduce the interest you are paying for the money you rented.

In other words, if you pay an extra $100, your next payment should have the interest on $100 added to the reduction in principal for that payment. However, that adjustment may be made quarterly, once a year, or only at the end of the loan. This essentially means you gave the mortgage company an interest free loan of $100 for whatever period you do not get the reduction in interest figured in.

The manner in which you divide the extra payments is just a trick you use to fool yourself. Add a fixed amount to each payment, make an extra payment, there are any number of schemes, it does not matter. X amount extra per X period of time. Read the documents to get the most cost effective timing of the payment.

What's a "check"?



I schedule payment on the lenders website and there's a specific box for extra principal (and extra escrow, which I don't understand why that would be an option).

Since there seems to be some issues with payments being processed incorrectly, maybe call the bank and ask how they want you to send the money so it gets done the way you prefer.

A check is a thing which results in a physical proof of payment in your hands, verified by your bank.

Electronic payments do not provide these safety features, and are much more likely to be lost or misapplied.

Twice on my mortgage, the electric company, multiple times with Comcast, but they don't really count.

Proof of payment is handy to have.

Say for example you got a notice that your property taxes, or your homeowners insurance is going up. You may want to pay extra into your escrow account so you don't get a lump sum bill at the end of your mortgage year.

I'm at 3.25%, I don't see almost any reason to pay that off early and not invest excess cash.

Thoughts?

How old are you? That’d be the only question in my mind.

Every year we end up having to pay an extra $500-700 or have our mortgage payment go up. This year we’re putting a little extra into that account to prevent having to lump sum it. We likely won’t put in enough but it’ll decrease the lump sum amount.

36

Yeah, that sucks. Nobody likes those kinds of surprises. We keep a Christmas savings plan going for that very reason, then we Christmas shop on a budget. That one holiday can screw up your CC's for a year if you don't plan right.

They should teach this stuff in junior high. Imagine how well you'd be doing if you started investing when you were a teenager.

Sounds like you have time to lay out a solid investment strategy. You can reevaluate in 10, 15, 20 years if your needs change, but your interest rate is so low, the bank is doing the heavy lifting on your house for you. No point in giving your money to them any sooner than you need to. If you have extra cash you have time to build a nice nest egg (by socking away as much as you possibly can in several high growth companies and sticking to it), while still building equity in your home through appreciation and reduction of principle. Contrary to thinking 20, 30, 50 years ago, your house will not likely end up being your largest investment, your investments (along with your 401K) will if handled properly.

One other thing you may want to look into if it applies. If you have a 401K program at work with a match, make sure you're maxing that out. The match is free money. Also, if you have the option of choosing your investment instruments - say mutual funds through Fidelity - pick your own and choose high yield (say 7% or better over 5 years) fund(s) instead of the company's recommended options based on the year of your retirement, or some other metric. The difference in percentages points can mean tens or even hundreds of thousands of dollars over the course of your career. Continually reevaluate (about once a year or so) to make sure you're getting the highest returns.

Good luck and happy investing!

Indeed. There should absolutely be financial literacy classes in high school. It’s absurd that it’s not required teaching frankly.

To the rest of your point, I made $2 an hour cash under the table at my first job. I was 15. I literally saved every penny until I could buy my first car. There was no leftovers for investing.
I then made under $10,000 a year. Most years far less. Typically I earned at or below what was considered ‘poverty’ levels, around $7300 at the time, from age 18-25. Getting my nursing license enabled me to have enough to actually put some away for the first time in my life. Even then I didn’t really start with my 401k until I was about 30.
So yes, I do wish I had started sooner. It just wasn’t within my financial abilities. So over the past several years I’ve doubled down. Hard. I know I can’t catch up to lost compounding interest but I strive to live on my financial edge. Balancing today’s comfort ‘needs’ with tomorrow’s desire to retire. With retirement winning in most cases. I don’t go without but I could be the guy on the block with an RV and a boat and a couple 4 runners.... I leave that for the neighbors. My reward for being financially smart throughout the years is a little world travel every 3-5 years. Sprinkle in a trip to my buddy’s condo on Maui. I live happily.

To the OP, find your balance. What works for me, or anyone else, may not be best for you.
At 36 you’ve got 25-30 working years left. You can work the length of your mortgage. Putting some extra away is a pretty solid plan.

Some thoughts: We have paid off many loans. Wife and I (we are not rich!) go as low as we can for as long as we can; then we go into a mode where we pay extra principal as often as we can. We add extra to every monthly payment. At end of month we try to do extra again.
We only want fixed rate. If you refi, that first year is a great time to load up extra principal. I think I was told if you can make the extra payment in first year, then you can cut years off the total. If you have extra cash, paying extra at refi can save money ("life of the loan" thinking is vital) over all. We also challenge ourselves with change; this has saved us tons over our married time. We save our pocket change and our one dollar bills. About once a month we roll it and and the dollars and pay on our largest debt, or our highest interest. We are disciplined about it and sometimes "salvage" about a hundred. That goes on principal, but you may need to specify that. Some just advance the amortization through the loan schedule. We want to pay on principal so the interest generates less.

We have never opted for the shorter loan length, because we wanted to be certain to make the payment. At times, an emergency might have prevented it. Our way lets us be aggressive as we can be as we are able. We always save something first.

This works well for us, and we are on fixed income. I suggest you pick one over the other and concentrate on that. Good luck. You are never wrong to reduce debt IMO. But meet all your needs first.

The conspiracy theorist in me says it's intentional, in a way. Big business and big government don't want a nation of savers and investors, they want a nation of spenders and people with RVs, boats, four runners, and massive credit card debt. Madison Avenue slams us everywhere we look with the notion that we're not good enough if we don't have this or that, or live this or that type of lifestyle.

Sounds like you have your priorities right. Many people don't and it's sad. I know very good people who are compulsive shoppers, always need the latest greatest, and measure their self worth based on what they own. The "I work hard, I'm going to play hard" mentality coupled with the Madison Avenue ideology has their heads turned around. I'm not "anti-toys" and I believe you have to have consumers to keep capitalism going, but many Americans are irresponsible with their money. The adage, "pay yourself first" makes sense for a reason. So does comparison shopping, not buying what you don't need, and living on a budget.

Anyway, good chat. I'm sure you'll be just fine.