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 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!.......…
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)
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.
Take the money and invest it. After 10 years you should be able to have a nice sum.
Depends on the interest rate. It may be better to send that extra payment to a money-market fund, allowing you to maintain liquidity, earning a similar amount of interest, and paying it all off when the numbers meet.
Of course then you have to be the type of person that doesn’t spend money just because they have money.
There’s quite a few things that I disagree with Dan Ramsey about, but he’s totally right about paying off a house. Life is certainly less stressful.
Being debt free is the way to go - took my wife years to get on board, but once she was, we paid off our house very quickly - now we travel around the world at least once per year.
JMHO
I am 79 years old and have owned houses and investment properties for 52 years. In all that time I have never had a mortgage mature at 30 years. I have always ended up moving or refinancing and paying off a mortgage early. In fact in the US the average length of home ownership is 8 years and the median is 15 years.
Doing these calculations is usually nothing more than a mathematical exercise, and has very little bearing on your day-to-day financial well being. And, when moving, having paid down an extra $10k on your principal has very little bearing on what house you can afford, although it will certainly negatively effect your standard of living.
I find it far better to invest regularly (pay yourself first), get a mortgage which is affordable under that saving regime, and then either invest any money left over or spend it on necessities.
1. If the interest rate on your mortgage is low, ask yourself if you really want to pay off the mortgage early. I bought my home in 2021 when interest rates were ridiculously low. I’d be a fool to pay off a 3% mortgage early when I have other options that can get me a better return on my money.
2. If you want to pay extra toward your mortgage, consider putting your extra money aside and investing it instead. Build up the balance in an investment account over time. At some point the balance in this account will exceed the remaining balance on your mortgage. Pay off your mortgage early THEN, if you’d like.
I would advise anyone considering extra mortgage payments to get a good understanding of the concept of liquidity before they do so.
You’re right. Additional funds must be directed or the mortgagee decides where it goes, most often into escrow. If there is no escrow, it’ll be advance payment.
Additional payments must be directed and done with the normal monthly payment (not just sending in extra checks separately).
Also, you cannot do the 50% payments bi-weekly payments “all on your own”, this may get you a penalty. You have to set up that “plan” with the mortgagee because, if you read your contract, payments are expected monthly only.
Escrow is your insurance and taxes. I never paid into escrow, I took care of it myself with three houses. Pay any extra you can monthly.
11 years ago when I bought my last house which was the last mortgage I have had, Wells Fargo pissed me off so much during escrow that I told my wife we weren’t doing anything for a Year. I paid it off in 10 months and made damned sure they lost their shirt on the deal, about $25K is what it cost them to piss me off. I paid CASH for the next one that I built and finished 18 months ago.
EXACTLY—DESIGNATE WHERE YOU ARE APPLYING THE MONEY
I would pay an extra $50 or $100 when I had it. KNOCKED DOWN THE LOAN quicker than I thought.
BFLR