

Subject:
What will the effect of paying my Mortgage principal down?
Category: Business and Money Asked by: oompahga List Price: $10.00 
Posted:
07 Apr 2006 15:05 PDT
Expires: 07 May 2006 15:05 PDT Question ID: 716598 
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.  


Subject:
Re: What will the effect of paying my Mortgage principal down?
Answered By: cynthiaga on 09 Apr 2006 02:09 PDT Rated: 
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] 9598% of your payment is used for interest, and only 25% 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/calcamort.html http://www.bankrate.com/brm/amortizationcalculator.asp http://www.calculators4mortgages.com/Calculators/AmortizationSchedule/amortization_schedule.html http://www.locallender.info/consumerbanking/mortgage/amortizationschedule.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!  
 
 
 
 

oompahga
rated this answer:
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. 

Subject:
Re: What will the effect of paying my Mortgage principal down?
From: ansel001ga on 07 Apr 2006 15:17 PDT 
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. 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: markvmdga on 07 Apr 2006 19:37 PDT 
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? 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: redfoxjumpsga on 08 Apr 2006 00:02 PDT 
Think Excel contains Enough variables to give an answer. OR Some Mortgage company web site must have a what if mortgage calculator. 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: cynthiaga on 08 Apr 2006 00:23 PDT 
I found several examples of Amortization Schedule Calculators: http://www.hsh.com/calcamort.html http://www.bankrate.com/brm/amortizationcalculator.asp http://www.calculators4mortgages.com/Calculators/AmortizationSchedule/amortization_schedule.html http://www.locallender.info/consumerbanking/mortgage/amortizationschedule.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. 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: myoaringa on 08 Apr 2006 04:31 PDT 
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. 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: oompahga on 08 Apr 2006 08:19 PDT 
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 prepayment penalty 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: myoaringa on 08 Apr 2006 17:51 PDT 
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. 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: onenonblondega on 09 Apr 2006 01:06 PDT 
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. 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: myoaringa on 09 Apr 2006 18:17 PDT 
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. 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: onenonblondega on 09 Apr 2006 21:45 PDT 
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. 
Subject:
Re: What will the effect of paying my Mortgage principal down?
From: sfremyga on 10 Apr 2006 00:09 PDT 
First, markvmdga'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 30year rate you have, and make your money work for you? Second, the numbers on this loan don't really add up for a normal 30year 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. 
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