We currently owe $252,000 on our house. We pay $2300 a month mortgage
plus taxes. [30yr fixed at 5.50%] We are considering paying additional
$20,000 towards principle. Our primary goal is to pay off our house as
soon as possible. I would like to know how many years would be left on
my mortgage by paying additional $20,000 towards principle, but also
continuing to pay the same mortgage payment each month ($2300 per
month)how soon we could pay off our house.

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Request for Question Clarification by cynthia-ga on 07 Apr 2006 16:29 PDT

1) How long have you been paying on your current loan? 

2) Did your lender furnish you with a printed Amortization Schedule?
It would look like many pages of numbers in a spreadsheet, usually
printed from a Dot-Matrix printer, detailing each payment (#1 through
#360); the payment amount, the amount of that which is 'principal" and
the amount that is 'interest' for each payment (#1 through #360) of
the loan. This means the spreadsheet is 360 rows long, 361 including
headers.

3) IF YOU DON'T HAVE THAT, Look at your last loan payment stub. Does
it list your last "payment number?" --this would be #1 for the first
payment you made, #2 for the second payment, etc.

4) IF YOU CAN'T FIND EITHER, call your lender and ask them to email of
snail mail you a copy of your Amortization Schedule.

5) Do you know for sure that your loan has no prepayment penalty?

If I can get these clarifications from you, I can explain how
prepaying principle works EXACTLY in your case. Without your exact
numbers, I can explain it to you in general terms.

Let me know what you can find. The lender should have no problem at
all forwarding you the schedule.

~~Cynthia

Hi ansel001,

I'll explain this in general terms, give you an understanding of the
concept, then you can apply the concept to your own loan.  Do call
your lender, ask them to send you your amortization schedule and ask
what payment number you are on.

You'll understand why after you read my answer in full.  First:

12 payments X 30 years = 360 payments. 

I suspect the reason why the Commenters numbers are not working is
because your payment includes what is called PITI: Principal,
Interest, Taxes, Insurance.  Since we don't have your schedule whick
would break this out, we can talk in general terms.

Each payment is comprised of principal and interest. In the beginning
of the loan, as much as [example only] 95-98% of your payment is used
for interest, and only 2-5% gets applied to the principle.

The amount applied to principal goes up a very small fraction, every
month/payment number. In the beginning, as little as $100.00 is
applied to principle, by the end of the third year you might be up to
$350.00. As the months tick by, then years, the principal amount
increases so in the end of the loan, you are paying of the house in
huge chuncks, and the amount being applied to interest is as low as
the principal amount in the beginning.

The lenders do this so they make their money at the beginning of the
loan. This type of loan is very expensive. Take your monthly payments
of $2375.44 --with 360 payments to make, that total is WAAAAY higher
than what you paid for your house:

   $2375.44
     X  360
___________
$855,155.40

Almost double.   Scary, huh?  And the lender is making money hand over
fist for the first few years, because most of your payment is applied
to the interest in the beginning of the loan.

Normally this "amortizing" doesn't hurt the homeowner because real
property increases in value to offset this. For the first 7 years of
so, you have paid virtually nothing on the loan.

Why am I telling you this? You need to understand how this works so
you will be able to visualize what happens to any "additional
principle payment."

Mortgage servicing divisions, accounts receivable, like to keep things
clean in the books. When they subtract additional principal, they do
it from the payment you are on, into the future. It is not subtracted
from the end of the loan, it is cut from the middle.  If you are on
payment 13 and you send extra money, they will apply it to principal
for payment 14, 15, 16, 17, in order, until the money you sent is
applied, spent. They PREFER that you send in an exact amount and tell
them what payments to apply the money to, so that it comes out exact
to the penny, up through a certain payment number.

That's why you need the amortization printout, and you need to know
what payment number you are on. You need to break out the calculator
and add up principal amounts starting with the next payment, until you
reach an exact amout to send them by payment number.  You can send a
lump amount and they'll do it for you, but this is an exercise of love
and learning. You will save several years off your mortgage and you'll
clearly see why paying down the principal is so important in the
BEGINNING of a loan. Near the end, the principal amount will be very
high and your $20K won't even make a one year dent.

Play around with these:

http://www.hsh.com/calc-amort.html
http://www.bankrate.com/brm/amortization-calculator.asp
http://www.calculators4mortgages.com/Calculators/Amortization-Schedule/amortization_schedule.html
http://www.locallender.info/consumer-banking/mortgage/amortization-schedule.asp

Look at the charts they generate, note how far $20K will go in the
beginning because the principal amount is so low.

I trust this has helped you understand how additional principal
payments work, how they are applied to the loan and why it's SO
IMPORTANT to do it in the beginning.  If I can add anything, or go
over something you don't understand, please use the clarification
feature and I'll assist further.


~~Cynthia


Search strategy: none... 25 years ago I called my lender about paying
extra principal, a really nice lady sent me my amortization schedule
and took the time to explain all this to me. I'm glad to pass it on!

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Clarification of Answer by cynthia-ga on 09 Apr 2006 02:15 PDT

If you can get an electronic version of your amortization schedule,
I'll help you figure out the exact amount to pay, and be able to tell
youi exactly how many payments you will remove from the length of your
loan. When you know how many payments your $20 will spread over, you
divide by 12 to get the exact number of years and months you will save
towards paying off your loan/house.

---

Request for Answer Clarification by oompah-ga on 09 Apr 2006 08:18 PDT

myoarin,

I have a 30-year fixed mortgage that has only been running for 1-year,
sorry for any confusion!  In effort to clarify what your saying, you
indicated that if i pay down $20k of principal, that the term of my
30-year mortgage will be reduced to 126 payments left or 10 1/2 years?

---

Clarification of Answer by cynthia-ga on 09 Apr 2006 13:53 PDT

Hi again ansel1001,

Thanks so much for the kind words and great rating! 

It would be really cool if the lender sent you the schedule in
electronic form so you can post it online and I can help you do the
figuring. Don't forget to ask for your exact payment number..!  --Even
if they don't send an electronic version, you could always scan the
relevant pages and I could help you that way.

In response to your question, your payment amount includes other
things besides the principal and interest, so NO, I don't agree with
the commenters estimates of the number of payments that will remain,
or the number of years. My "guestimate" is it will save you about 5-7
years off the length of the loan.

~~Cynthia

---

Request for Answer Clarification by oompah-ga on 09 Apr 2006 18:10 PDT

Cynthia,

I hope to get the amortization schedule from my mortgage
company....One way or another i will try to post it for your review
sometime this week.

Thanks again for you assistance.

oompah

---

Clarification of Answer by cynthia-ga on 21 Apr 2006 02:39 PDT

Any news?  I'd love to help you figure out the number of months (in
years) that you will save!

Cynthia,

Thank you very much for your prompt and detalied answer!  I will call
my lender tomorrow and ask them to forward me an amortization schedule
immediatley.  Although from the other comments below is sounds, as if
the number of payments could pontentially be reduced to approximately
126 total payments or 10.5 years left on my mortgage?  Please advise
if you agree with my statement.

That would depend on how many years you have left before your mortgage
is paid off.  The earlier you pay additional principle, assuming there
is no prepayment penalty, the more difference it makes.  That is to
say, more time is saved on paying off your mortgage if you pay an
additional $20,000 towards principle when there are 29 years left than
when there are 10 years left.

You must note that the lower your mortgage, the lower your mortgage
tax deduction and thus the lower your benefit from this deduction.

Also, if your 20K can make more than 5.5% (plus related benefits as
from the mortgage interest deduction), you would do better to invest
than pay down.

Why not look for a rental property to buy with your 20K?

Think Excel contains Enough variables to give an answer.  OR

Some Mortgage company web site must have a what if mortgage calculator.

I found several examples of Amortization Schedule Calculators:

http://www.hsh.com/calc-amort.html
http://www.bankrate.com/brm/amortization-calculator.asp
http://www.calculators4mortgages.com/Calculators/Amortization-Schedule/amortization_schedule.html
http://www.locallender.info/consumer-banking/mortgage/amortization-schedule.asp

The thing is, if the asker will answer my questions, I can use those
numbers which will male the concept of how to prepay an amortized loan
much easier to understand, plus my answer will be useful as a guide,
otherwise s/he will have to apply the principle of what I say to the
actual case. When you enter the numbers above into any of those
calculators above the results are wrong because the loan is ongoing
and not new.

Using my HP calculator, it seems that $2300/month at 5.5% pa
(calculated monthly), will pay off your loan of now $252,000 in 153
months, suggesting that the original loan has been in existence for
many years.

If this is not so, we need to check the figures given  - or my calculation.

If the principal can be reduced to $232,000, the existing payment
schedule will shorten to 136 months, reducing your total payments by
$39,100.

As Cynthia pointed out, there may be charges for prepayments  - the
bank is allowing you reduce your interest expense, its income.

1. my current loan has been in place for about a year
2. Principle Balance= $246,247.04
3. Total Monthly Payment= $2375.44
4. Term= 30 yr fixed mortgage
5. Intrerest Rate= 5.5%
6. Lender has not provided me with a printed amortization schedule
7. Does not list last payment number
8. Not sure if there is pre-payment penalty

I really didn't expect that the mortgage had be running for long, but
you say 30 years.  Doesn't really make sense.
Anyway, with the exact figures, I calculate exactly 141 remaining
payments (to the nineth zero decimal place, so it looks like it agrees
with the bank's method).

If you can reduce the principal by $20,000, you would have only 126
remaining payments, reducing your total payments by $35,631.60

Your lender should provide you with some documentation, especially
with a statement of interest paid in 2005.  You need the information
for taxes.

You really need to know the principle balance because a portion of the
payment is some combination of mortgage insurance, taxes, homeowners
insurance, etc.  That is likely why no one's math is working with the
numbers provided.

Oompah,
I stand corrected by Cynthia's and Onenonblonde's pointing out that
insurance and maybe tax is also included in the payments  (although
you mention "plus tax")
So my estimate of the number of payments was way, WAY off.  Sorry!

I know that everyone is initially upset to discover that mortgage loan
payments in the first years are mostly interest, but this is not some
gimmick to make lenders rich.  They still only are earning the set
interest rate on the principal, which at the start is high.  By
reducing the principal early on, you reduce the interest portion in
the payments and increase the repayment portion.

Use one of the mortgage calculators provided in the link.  You will
find that apx $1400 a month is primium and interest.  Subtracting
$20,000 from the principal, will make the primium and interest
required payment apx $1300, so keeping the same payment, you will be
subtracting an extra $100 a month from your principal. (increasing
exponentially as the interest decreases).

With that large of an "extra" on your payment, it would seem likely
that you are paying Mortgage insurance.  Once you have the principal
at 80% of the appraised value of the home, you can probably drop the
mortgage insurance. (It's usually required for loans with less than
20% down).  If you maintain the same payment, without the mortgage
insurance, you will be subtracting that premium amount from your
principal.  You may have to refinance to lose the Mortgage insurance,
but if you can it is well worth it to you, in fact, you can probably
get a 15 yr loan without mortgage insurance for about the same
payment.

FYI, the mortgage insurance protects your lender in case you default. 
It is of no benefit to you,(other than being a requirement to secure
the loan) It won't protect your credit, it won't keep you from being
responsible for repayment of the loan.

First, markvmd-ga's comment bears repeating.  It might be worth taking
a step back to consider alternative uses for that $20,000. 
Fundamentally, paying off $20,000 of your mortgage represents
investing those funds for at least ten years (as the amortization
isn't clear from the thread) at roughly 4.13% (assuming a 25% tax
bracket for the mortgage interest deduction.)

Historically, if you were to invest that amount in a reasonable equity
portfolio, you could potentially double that return after tax.  Why
not take advantage of that great low 30-year rate you have, and make
your money work for you?

Second, the numbers on this loan don't really add up for a normal
30-year amortization.  Assuming an original loan balance of $252,000,
you normally would have a P&I payment of $1,430.83 per month.  Either
it's front loaded, and/or there are some significant additional items
being paid (homeowner's fees, property taxes, PMI).  Assuming the
$1430.83 is the right number, then paying off $20k shortens your
amortization by only five years.