Posted on 08/17/2024 8:13:07 PM PDT by where's_the_Outrage?
If you own a home, you've probably heard the age-old advice to pay more on your mortgage so you can pay it off faster. But what happens when you don't have thousands extra to throw at your mortgage each month?
There's a really simple way to pay a little extra -- by making mortgage payments every two weeks. Don't worry, you're not doubling your costs! Instead, you pay half your mortgage payment each time. It's a great strategy for sticking to a budget since many jobs pay every two weeks. And, because there are 52 weeks in a year, you'll actually make 26 half payments in a year. That's 13 full payments each year instead of 12.
But is paying just a little bit extra worth it? It might be.
Paying even a little more toward your mortgage can shorten the life of the loan and save you money. But how much? Let's say you purchased a $400,000 home in 2020 when interest rates were around 4%. We're also going to assume you were able to save up 20% and make a down payment of $80,000, so your total loan balance was $320,000.
If you made regular payments (meaning one a month, so 12 in a year), you'd pay off your loan in 30 years and pay a total of $229,982 in interest.
If you made 13 payments in a year, you'd pay the loan off in 25 years and 11 months, and pay $193,382 in interest. You'd save $36,600 in interest over the life of your loan.
(Excerpt) Read more at fool.com ...
What should be stated is the people need to direct additional money to the principal. So don't make an extra payment, direct extra money in a payment to the principal.
I've seen where companies have put unspecified money into escrow or post it as an advanced payment. There should be a line when making a payment to direct the money to principal.
Depends on the interest rate and relative returns you could get elsewhere.
Amortization calculator:
https://www.calculator.net/amortization-calculator.html
It all depends on your mortgage rate and the returns you are getting on your other investments.
If you have a low mortgage rate and are earning more on your investments elsewhere, do not accelerate mortgage payments.
If you have a high mortgage rate and low returns elsewhere, then yes make the additional payments.
You have to look at the opportunity cost of your money.
The other factor is how much you have saved for the inevitable rainy day. Be sure to fund your emergency savings first. You never know when you are going to get laid off. A very conservative strategy is to have six months of savings in the bank or liquid investments. That is very hard to do, but it’s the first place you should park your money before making an extra payment on your mortgage.
Not in an inflationary environment - you are just paying debt early with more expensive dollars.
I have a little bit auto transferred in the middle of the month, directly to principal. I don’t escrow insurance and taxes so I never thought about the lender not applying it to principal.
Anyway, I won’t live to see it paid off, so lowering the balance is really a gift to our daughter when we die. Which I like doing.
Don’t do it. Wait until rates drop enough and then refinance to a 15 year.
Let’s not forget that you will pay an extra 38000 in those 25 years. Pay an extra 38k to save 32k? And you have opportunity cost on the 38k. Not simple anymore. Buy T bills at 5% and in 25 years you will have 72k. So. Really not so simple anymore. One size doesn’t fit all.
I agree with you. They are going to make it difficult (whether by established ‘process’ or just by wanting the extra interest in the long run). One may have better luck with a credit union or something but dealing with the PMI, escrow for taxes and payments just seems like a hassle.
I walked into closing 23 years ago and walked out in only 15 minutes flat. No escrow, no PMI, nothing. Paid cash. Remarkably straight forward.
I think it’s a good time to lock in your mortgage. The US may be losing its reserve status and interest rates may jump to get people to buy the debt bonds.
I disagree. I bought my 1st house in 1984 with sky-high rates, by adding $100 to my 1st payment I cut a year off my loan. So if you are at the beginning of your mortgage you might see major benefits in loan length by paying extra.
But to me the best financial security is being debt free.
I paid off a 30 year 6.75% mortgage at 16 years thanks to Trump lowering the tax rate. I was able to take money out of my 401K and pay it off way early!
I will be forever grateful to him for that!.......…
I disagree, we each have priorities and mine has been wanting to be debt free. I first accomplished that in 2002, life became easy.
However life’s events caused me to buy homes in 2018 and 2020, got great low interest rates on VA loans. But paid off both early and have no regrets.
Any extra money paid should automatically go to principal.
An advantage of making payments early is that it reduces the tota1 number of payments more than extra payments later. A downside is that future payments will contain less interest and tax deduction. If you pay down enough, you could refinance and get a lower payment and start the process over again. This has the advantage of being able to handle the mortgage payment if your income declines.
They really should teach compound interest in high school.
If you can use Excel, know your interest rate and balance, you should be able to run through various scenarios. The interest rate is normally a nominal monthly rate (divide the rate by 12 and apply it to the outstanding balance yields the interest for the month. The remainder of the payment is for principle, taxes, and insurance. (Your mortgage company can give you the monthly expenses. They should give you a payout schedule)
“I was able to take money out of my 401K and pay it off way early!”
What was the return on your 401k?
When I turned 59 1/2 I had minimal income, I took a large chunk of my 401K (about $50K) and paid $0 taxes, was able to do that for several years until I got SS.
Unfortunately I moved to Michigan, and while I can avoid federal taxes, state taxes hit me by disallowing out of state deductions. Hope to fix that be leaving Michigan in a few years.
What isn’t talked about much is risk. If your mortgage is paid off, unemployment risk is not nearly what it is if you have a mortgage to pay.
I really don’t remember, because the company I worked for cancelled our 401K deductions and I had to roll it over to an IRA at my credit union............
I called my mortgage company and asked for the payoff on a certain date a month away and they told me it was $43k+/-.
So, since my ‘new’ IRA was only paying like 2% I took the money out and sent it in to cancel a 6.75% mortgage................
Take the money and invest it. After 10 years you should be able to have a nice sum.
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