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View Full Version : Another mortgage question- extra payments


Joey Tightlips
04-02-2009, 01:40 PM
I'm confused about how banks handle extra mortgage payments. For this example, lets say I have a fixed $100,000 loan for 15 years at 5%. I understand that at the time the mortgage was issued, they can figure out the interest over the life of the loan with compounding and say it comes out to a $1000 a month payment. Now lets say every year I've been taking my annual work bonus of $5000 and applying it directly to principal (I've been doing this for 3 years in hopes to pay off the house well ahead of 15 years).

The thing I don't understand is how the extra payments affect the loan. Do they lower the monthly payment to account for the new, lower principal and interest amounts? If so, at what point would they adjust? (end of year? monthly? at the time of payment?) Or does the monthly payment amount stay the same with the life of the loan shortened. If this is the case, how can I tell how many months I've saved off the life of the account by making the extra payments?

While the numbers are not exact, this is basically the situation I'm in. I have been making extra payments but my monthly amount is no lower than when I started. The confusing part is that my taxes and insurance are rolled up into the mortgage so it is very hard to say for sure where the extra money is going. I can see that my remaining prinicpal is well below what it would have been without the extra payments. However I have seen nothing in my statements to signify that I'll be done with loan ahead of schedule (I also don't see an online option to give me a new amortization schedule).

I hope this makes sense. Any light you can shed on this is appreciated.

J-P L
04-02-2009, 02:05 PM
Typically, mortgage payments are made up of part principal and part interest, as you make payments, the interest part goes down and the principal part goes up, any taxes or insurance are added.

When you make a lump sum payment, the principal part gets a sudden boost up while the interest part takes a drop.

In the end, you will have paid off your mortgage sooner.

beowulff
04-02-2009, 02:18 PM
I do this.

What happens is: Your P&I (monthly payment) remains the same, but the percentage of principle that gets paid goes up. In other words, your monthly $1000 payment starts off (at the beginning of the loan) as $10 to principle and $990 to interest. As time goes on, you start to pay more and more to principle, until at the end of the loan, your last payment might be $990 to principle and $10 to interest (these numbers are just for illustration, YMMV). When you make additional payments to principle, your percentages get recalculated - you end up paying more to principle sooner than you otherwise would have.

This is why it makes sense to make your extra payments up front - if you pay an extra $1,000 on the first payment, you might save 3,4,or 5 (or more) months of payments at the end. If you wait until the end, you are only going to save 1 payment.

Keeve
04-02-2009, 02:19 PM
In the end, you will have paid off your mortgage sooner.But the OP wants to know: How much sooner?

Mr. Slant
04-02-2009, 02:22 PM
Keeve,

If so, bankrate.com has a calculator that probably provides a fairly decent answer.

beowulff
04-02-2009, 02:25 PM
But the OP wants to know: How much sooner?

I use this: http://www.mtgprofessor.com/Spreadsheets/Xtrapmts.xls

Joey Tightlips
04-02-2009, 02:55 PM
Thanks all, I'll try the calculators suggested and see if it meshes with what I was expecting. Seems like something the bank would offer but all I could find on the bank website (Wells Fargo) was an option to see how much it would take to pay off the entire loan today.

Zsofia
04-02-2009, 03:21 PM
You can do the same thing easier by paying your mortgage every two weeks instead of once a month. You have to call them to set it up (I have Wells Fargo too) but after that it's completely trouble-free and it's like it's not real money. (Obviously, it works because some months have five weeks, which works out to about an extra payment.)

Duckster
04-02-2009, 03:23 PM
I use this: http://www.mtgprofessor.com/Spreadsheets/Xtrapmts.xls

I've found many of these free spreadsheets are poorly written, and the formulas and algorithms used highly suspect. A simple code error can be difficult to locate, meaning your data results could be way off from reality.

Make sure you test the spreadsheet with simple data that you can compare with a calculator and/or pencil and paper calculation. Once you are satisfied, plug in the real data and experiment on how you can manipulate the numbers.

Kalhoun
04-02-2009, 03:48 PM
I'm confused about how banks handle extra mortgage payments. For this example, lets say I have a fixed $100,000 loan for 15 years at 5%. I understand that at the time the mortgage was issued, they can figure out the interest over the life of the loan with compounding and say it comes out to a $1000 a month payment. Now lets say every year I've been taking my annual work bonus of $5000 and applying it directly to principal (I've been doing this for 3 years in hopes to pay off the house well ahead of 15 years).

The thing I don't understand is how the extra payments affect the loan. Do they lower the monthly payment to account for the new, lower principal and interest amounts? If so, at what point would they adjust? (end of year? monthly? at the time of payment?) Or does the monthly payment amount stay the same with the life of the loan shortened. If this is the case, how can I tell how many months I've saved off the life of the account by making the extra payments?

While the numbers are not exact, this is basically the situation I'm in. I have been making extra payments but my monthly amount is no lower than when I started. The confusing part is that my taxes and insurance are rolled up into the mortgage so it is very hard to say for sure where the extra money is going. I can see that my remaining prinicpal is well below what it would have been without the extra payments. However I have seen nothing in my statements to signify that I'll be done with loan ahead of schedule (I also don't see an online option to give me a new amortization schedule).

I hope this makes sense. Any light you can shed on this is appreciated.

The life of the loan was shortened for us, and I suspect it would be the same for you. Your other option would be to refinance/renegotiate the loan for another 15 years, with the new, lower amount due.

The amount you're putting toward it is good, but if you figure it in months, you've done this for 3 years and have paid an additional 12 months in payments. That means you've knocked a year plus interest off. I cannot help you with the interest figures. This is just a rough idea.

Hampshire
04-02-2009, 03:52 PM
You can do the same thing easier by paying your mortgage every two weeks instead of once a month. You have to call them to set it up (I have Wells Fargo too) but after that it's completely trouble-free and it's like it's not real money. (Obviously, it works because some months have five weeks, which works out to about an extra payment.)

Works nicely if you get a paycheck every two weeks (26 paychecks).
Not as nice if you get a paycheck twice a month (24 paychecks).

beowulff
04-02-2009, 03:55 PM
I've found many of these free spreadsheets are poorly written, and the formulas and algorithms used highly suspect. A simple code error can be difficult to locate, meaning your data results could be way off from reality.

Make sure you test the spreadsheet with simple data that you can compare with a calculator and/or pencil and paper calculation. Once you are satisfied, plug in the real data and experiment on how you can manipulate the numbers.

The one I referenced is accurate.

Joey Tightlips
04-02-2009, 04:07 PM
The amount you're putting toward it is good, but if you figure it in months, you've done this for 3 years and have paid an additional 12 months in payments. That means you've knocked a year plus interest off. I cannot help you with the interest figures. This is just a rough idea.

Beowulff's spreadsheet gave me exactly what I needed. In case anyone's curious, in my example, three extra $5000 payments at the end of each of the first 3 years end up saving about 3 years off the life of the loan. When I plugged in my actual loan numbers it came out closer to 5 years!

I knew the extra payments would pay off huge by being so early in the life of the loan but I didn't expect it to be quite so dramatic. Compound interest is pretty amazing when you see it in action (how did the banks manage to go out of business again?!). Thanks, this has made my day!

Kalhoun
04-02-2009, 04:34 PM
Beowulff's spreadsheet gave me exactly what I needed. In case anyone's curious, in my example, three extra $5000 payments at the end of each of the first 3 years end up saving about 3 years off the life of the loan. When I plugged in my actual loan numbers it came out closer to 5 years!

I knew the extra payments would pay off huge by being so early in the life of the loan but I didn't expect it to be quite so dramatic. Compound interest is pretty amazing when you see it in action (how did the banks manage to go out of business again?!). Thanks, this has made my day!

See! Told ya I knew nothin' from interest calculatin'!

We paid off 10 years in one year. All I know is that the note was due in 2018 and we paid it off in 2008. Fan-fuckin'-tastic, but I don't have the know-how to figure the impact on interest!

Good luck on your journey to mortgage freedom!!

dracoi
04-02-2009, 04:40 PM
I did the math myself on my own mortgage. My policy is to round the payment up to the nearest $50 or $100. That's been between $15 and $35 each month. Pretty tiny, especially compared to an original loan amount of $210,000. And yet, the result is paying the mortgage off in 27 years rather than 30.

My lender is Countrywide and they have a calculator on their site that seems to match the results I got in Excel. Try Google for a lot of different loan amortization calculators.

nivlac
04-02-2009, 05:10 PM
This topic was discussed ad nauseum here (http://boards.straightdope.com/sdmb/showthread.php?t=495797&highlight=mortgage+payment).

Khadaji
04-02-2009, 05:12 PM
Good for you for paying off early. I am planning on paying mine off as early as December this year or as late as Feb next.