What's Faster for Mortgage Payoff: $100/Month Extra or 1 Payment/Year Extra?

By Julie Rains on 10 August 2007 (Updated 13 August 2013) 53 comments

Recently, a reader with a 15-year mortgage and an interest in accelerated mortgage payoff asked if it was better to pay $100 per month extra ($1,200 per year) or make an extra payment at the end of each year? The short answer: it depends on your loan balance and interest rate, though generally the higher extra payment is going to result in a faster payoff. There's more, but I'll go ahead and put my disclaimer here and say that I am responding to an inquiry not necessarily recommending that you pay extra on your mortgage. (See also: 6 Great Reasons for Paying off the Mortgage on Your Home)

Here are the detailed calculations:

As with any financial calculation, you have to make assumptions so I've created these: $200,000 loan balance, 15-year fixed rate mortgage, and 5.93% interest rate (which was bankrate.com's average rate when I first starting researching this question on August 3, 2007). So, your monthly payment (principal and interest not including escrow amounts) is $1,680.16.

Add $100 to the monthly payment and you will pay off the loan in 165 months (13.75 years); or add an extra payment at the end of each year and you'll pay off the loan in 160 months (13.33 years). Just for fun, I did calculations on balances from $100,000 to $400,000 at the 5.93% rate and, if you make the one extra payment every year, you will always pay off the loan in 160 months. However, if the loan balance is $100,000 and you pay $100 extra each month, then you will pay off the loan in 152 months (12.67 years); if your loan balance is $400,000, the payoff is at 172 months (14.33 years). (See also: Fixed or Adjustable? Choosing the Right Mortgage Loan)

Now you may be wondering if there is any advantage in making extra monthly payments throughout the year rather than waiting until the end of the year. There is a slight advantage. For example, if you took that extra payment amount ($1,680.16), divvied it into 12 equal payments ($140), and then paid $140 extra each month, then you would pay off the loan in 159 months (rather than 160 months if you paid the $1,680.16 at the end of the year, every year).

Also, why would you want a 15-year mortgage?

Generally, 15-year mortgages will offer a lower interest rate. So, over the life of the loan, you will pay substantially less interest as compared to a 30-year loan because 1) you are paying more principal earlier in the life of the loan, and 2) you have a lower interest rate.

Here are some differences between the 15-year and 30-year fixed rate mortgage, given a $200,000 balance and a 6.26% rate on the 30-year, fixed rate mortgage.

15-year mortgage

  • Monthly payment: $1,680.16
  • Total Payment: $302,428.68

30-year mortgage

  • Monthly payment: $1,232.74
  • Total Payment: $443,784.77

Differences between 15-year and 30-year fixed rate mortgage

  • Monthly payment: $447.42 more for the 15-year mortgage
  • Total Payment: $141,356.08 more for the 30-year mortgage

You could take that extra $447.42 and invest it rather than put it toward your mortgage; if you earned more than 6.26%, you'd come out ahead (not considering tax implications). (See also: Top 10 Real Estate Write-Offs)

Still, there is something attractive about paying off a mortgage in 15 years. Here are some scenarios where the shorter, lower rate mortgage makes sense:

  • You want to save as much in interest as possible and you want to be debt-free as quickly as possible.
     
  • You are fully investing in your 401(k) and any other nontaxable accounts for which you are eligible.
     
  • You are saving and investing regularly.
     
  • You don't want to think about accelerating your mortgage payoff anymore. (To me, the 15-year mortgage offers a built-in acceleration.)
     
  • You and/or family members like the way that the shorter-term mortgage helps you stick to a budget. (That is, you may be likely to spend the extra $400+ per month rather than invest it if you don't opt for the longer-term loan.)

If anyone is clamoring for a spreadsheet to do your own calculations on a 15-year fixed rate mortgage, let me know and I'll upload one. Or check out my 30-year mortgage schedules at DIY Mortgage Acceleration.

4.086955
Average: 4.1 (23 votes)
Your rating: None
ShareThis

comments

53 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Guest's picture
Guest

You are in your (say) 50's, have found the home you want to remain in for the forseeable future, and expect, all things being equal, another 15 years of income as opposed to another 30 years. (Yes, I know there's many a slip .. .. and using this as a basis of financial planning for the future is "not good" - but neither is having a mortgage payment when you're in your 80's).

Guest's picture
David

We are still in our first house, which we purchased in 2001 just before we got married. We paid 86k for it. Our first loan was for 30 years at 7.375%. We refinanced in 2003 (when rates were so low) at the advice of a friend.

Our new loan is 15 years @ 5%; we are 4 years into it and are looking at paying our home off before we're 40. Our son will be 13 then.

This means that we'll have the option of going on some nice vacations then. Perhaps I'll finally restore our old mustang. Or, if his grades are looking like mine did when I was in high school, we'll sock more away for his college. :(

Guest's picture

We would like to refinance our home to a 10 or 15 year mortgage. We cannot afford the payment we have now-my husband is disabled and my job cut my hours to three days if any one out the can help us out with this we would surely would appreciate it. We never intended to have a 3o year mortgage at our age. Its been very hard on us but we don"t want to loose the house PLEASE HELP US.Thank You very much Carol and Roy

Guest's picture
Guest

Supercharge Your Mortgage is a totally self directed, step by step mortgage equity accelerator program. The book on CD is in "Point and Click" page turning format and comes complete with easy to use interactive calculators to track your equity growth. The Phenominal Program That Enables Mortgage Free Home Ownership! Change Your Life Forever“Supercharge Your Mortgage”, the system that is mathematically proven to work! It cannot fail! Whether you've had your mortgage for 1 month or over 20 years, it works! If you have a fixed rate, adjustable rate or interest only loan, it works! If you have a Conventional, VA or FHA loan it works! Just refinanced your home or making bi-weekly payments? It works! No matter what kind of home loan you have, if you are making a house payment, "Supercharge Your Mortgage" will work for you! Find it at http://www.SuperchargeYourMortgage.com or Amazon Books has it..

Julie Rains's picture

Or, you could check out this free offering from wisebread: DIY Mortgage Acceleration, http://www.wisebread.com/diy-mortgage-acceleration. Some may consider it phenomenal.

Guest's picture
Guest

Thanks Julie, your posting was very helpful. Besides additional payments, paying half your monthly mortgage every two weeks instead of every 30 days also reduces the time it takes to payoff your mortgage, is this correct? For example, if $2,000 is the monthly payment, and we elect instead to pay $1,000 every two weeks, this would accelerate payoff. How would this work out with your $200K mortgage scenario?

Julie Rains's picture

Here's how I see it if your mortgage payment is $2000 per month. If you make monthly payments of $2000, then you will pay $24,000 per year on your mortgage (12 x 2000). If you make payments every 2 weeks, then you will pay $26,000 per year (52/2 x 1000). So you are making the equivalent of an extra payment each year. 

Now, it seems that paying earlier in the month should have an advantage. Theoretically, if you pay early (even a partial payment), the principal should be reduced at a faster rate, causing you to pay less interest, so that more of your payment is applied to the principal and you would pay down the entire balance faster. I think that this strategy would work if you have a credit line (and payments were applied to the balance immediately) but I am wondering if your payments on a mortgage would be applied just once a month and the principal balance lowered once a month. You'd have to check your mortgage contract to see how and when the payments are applied. So....I think the real advantage is that you are paying $2,000 extra every year ($26,000 vs $24,000).

I can run the numbers if you'd like -- do you have a 15 year or 30 year loan, and is it a fixed rate loan? The interest rate would be helpful also -- if you had a $200,000, 15-year loan and had a payment of $2000 (principal and interest only) then the interest rate would be 8.75% (or close to that) and the acceleration allow you to pay off the loan in 156 months (or 13 years).

Guest's picture
GARY JOHNSON

HOW TO PAYOFF 15 IN 8 YEARS.

Guest's picture
Guest

For the majority of homeowners who have a relatively low rate on their mortgage, investing the money instead of taking on a 15 year mortgage should lead to greater wealth creation. If the rate on my mortgage is 6.25%, my after tax cost is going to be lower, assuming that I file long form and am above the standard deduction. For arguments sake, lets say my after tax cost of my mortgage is 5.625%.

Now, lets say my mortgage amount is $200,000. My principal and interest payment would be $1,231.43 per month 30 year fixed at 6.25%. A 15 year loan at 6% would be $1,687.71 per month. The after tax cost of this rate is lower than 6%, but because less interest is paid each year, the spread isnt as large as is true in the 30 year example. You do get less of a tax deduction with a 15 year loan. More importantly, what if instead of paying the extra $456 on your mortgage each month, you were to invest it instead? Over 20 years, I would say that averaging 7.5% on this is quite conservative and more than realistic.

In 20 years, this would equate to over $250,000. The other tremendous advantage is that the money would be liquid. This is important if things in your life go very wrong (job loss, serious illness) or if things go very right (investment opportunity).

Paying off your mortgage early is certianly not a bad idea. It just isnt the best idea for many of us.

Also, never sign up for bi-weekly mortgage programs. You can do the same exact thing by dividing your monthly principal and iterest mortgage payment by 12 and adding this amount to your payment each month. It does the same exact thing and doesnt cost you a dime to set up, and their are no transaction fees!

Mortgage Accelaration plans: These are NOT for everyone! You must have 1. Good credit 2. Some equity 3. A relatively high average balance in your checking account each month.

Also, if anyone tells you that you need to refinance your first mortgage to do this, they are ripping you off. Same goes for the network marketing firms that charge the outrageous fee of $3,500 to do this. They will tout this "software" that will guide you thru the program. This software is completely unneccesary. We offer this for $995. If you are not in a state that we are licensed in, maybe I can direct you to a firm that will help. Again, most people are better served to invest and use arbitrage, rather than this program-but if you are really debt adverse, this might be a good program for you.

Robert Smith
City Federal Mortgage

Guest's picture
Alexander

Mortage interest is tax deductible, you want to take advantage of this as well. I say stretch the loan out for as long as you can as long as you have a separate investment earning a higher interest rate which is definitely doable. You funnel money into the investment and let the investment pay for your loan. Maximize tax advantages with mortgage interest. Also pay with a credit card and you can take advantage of 0%apr deals or at the very least earn an extra 20-30 days where your money is earning interest elsewhere, and then you can take advantage of rewards points on your credit card as well as they add up. You can make it even more fun if you have multiple cards with 0% apr deals and just keep on transferring the funds over between cards all the while your money is earning interest somewhere like an online high % savings account like ingdirect.com, hsbc..etc. Being rich is all about working the existing system, it doesn't take brains, it just takes a little creative engineering with your finances and using debt to your advantage. It's also about being able to keep the habit that even though you're saving 400 bucks by stretching it ut over 30 years that you're going to invest those savings as well. This same principle could be applied to student loans as well. If you have a debt at 8% and you qualif for a loan at 5% doesn't it make sense to take out the loan at 5% and use that to pay off a portio of the 8% loan? If the stock market earns roughly 8% a year and you have debt at interest less than 8%, where should your money go first?? There are risks involved so it's important to have some liquid cash available and you can always sell stocks to liquidate funds. The possibilities are endless and even better if you're rotating 3 credit cards, all the while earning rewards points that you can use towards flights etc. You can say it's risky and get nowhere, if yu take the plunge, you 1 earn money, 2 draw even, 3 lose money, 2/3 cases you're in good shape, if not better, worst case scenario you lost someone elses money and more than likely you still have the cash anyway to be buying whatever it is in the first place.

Key points:

Know your means, don't buy a house greater than 2.5 times your income.....if not rent and invest the savings until you can afford the house you want.

Take advantage of tax benefits. Use savings to maximize retirement accounts, hsa...and other advantages the goverment may be giving you in your situation that betters you off in the long run anyway.

Use credit to your advantage, shift accoutns wisely...(put money in an interest accruing investment that's higher in the positive than your debt's interest in the negative, and use less expensive debt to fund more expensive debt. Rotate credit cards making sure you meet minimum payments...thus creating money out of thin air even if you have the money in the first place.

Guest's picture
Banker Chris

Working in a bank I see people every day that are focused on paying off their mortgage asap and let other debt pile up. While paying off you mortgage early is a great idea PLEASE don't forget to pay off other debt FIRST. I just shake my head when I see someone who is paying extra on a 5% mortgage and then making minimum payments on a 22% credit card or regular payments on a 9% auto loan. Use the extra money here first.

Your mortgage is a long term debt payoff that should be addressed once you payoff everything else. Besides you are eroding away one of your largest tax breaks.

Just my 2 copper.
Banker Chris

Guest's picture
Toby

You may use the extra payment method or a biweekly method, but there is a third method that uses a line of credit as your primary checking account. Monthly you pay your mortgage as normal from your line of credit and then pay an additional lump sum from your line of credit. Your income is deposited into your line of credit to cancel out the interest during the month.

There are now about a dozen or so companies out on the market now that offer a service/product to create a customized plan that will maximize your mortgage payoff date and save you thousands of dollars in interest. The cost for the service ranges from $200 to $3500. Follow my link if you want to learn more about this mortgage acceleration method and view a list of these companies.

Guest's picture

Err... Gary, do you mind elaborating on that cryptic one-liner of yours?

Anyways, I got a lot of clarifications here. I'm really in a tight spot right now and I feel clueless about my mortgage issues. Thanks for the post, Julie!

Guest's picture
martha in mobile

My brother calls his mortgage "the cheapest money you'll ever borrow" which is, of course, true. My dad says "own your home free and clear so no one can take it away from you" which is also true. So my brother lives a very fine life with lots of world travel and is mortgaged up to the hilt, my father is still saving money and using duct tape to repair his clothes even though he is in his eighties, and I am trying to maintain a sane path between these two extremes.

I have a 15 year mortgage at 5%. I round up my payments so that it will be paid off just as my child goes to college. There is little tax benefit for me -- my deductions are barely more than the standard deduction.

Guest's picture
mary

I have a home loan that is 9.9%interest balance is $37625.00 my payment is 385.00 per month I want to pay $200. a month extra will this help to pay this loan off. The current loan is a 20yr. loan thanks Mary

Guest's picture
Guest

I am confused as how mortgage companies can add 13-15 days (yes that what mine is doing - to cover post closing days) of interest to my payoff balance. They said anything extra will be credited to me after closing. But they have already added that amount to my new loan amount and I will be paying for it monthly for the life of my loan approx $1800, the amount of the interest is much lower than that but I get stuck paying more for it?? How can that be, is there a way around all those days and having it tacked to my new loan amt? Thanks

Julie Rains's picture

mary, any extra payments will help pay off the balance faster. Guest, I haven't encountered that particular situation but I can say that banks are not always great at math (seriously) so you might want to ask your closing attorney or the agency who regulates these matters to determine what's wrong -- I can see them tacking on interest but it sounds like inflated interest here.

Guest's picture
Guest

I have a 30 yr. mortgage at 5.875, I am adding about $300 a month to principal to pay off faster. How much more will I save by refinancing to a 15 year mortgage at 4.50?

Jean

Julie Rains's picture

I need to know the loan balance and where you are in the mortgage schedule (first year or 10th year, for example) to give a reasonable response, and it depends on your inclinations. The 15-year schedule will force you to pay off early whereas you'll have more flexibility with the 30-year schedule.

Guest's picture
Sherry

I have a 15 year mortgage and have been in it for about 7 years. My balance is $63,890 at 5.125%. Is there any reason to try to refinance again? My main focus is to pay off the house as soon as possible and be mortgage free! My payment is $1129.93 with principal being $525.22 and interest being $281.89 and escrow is $322.82. I think I have about 8 years left if I make just the regular payment. What are some options for me? And I am not interested in investing any money that could go toward the mortgage. Just want to get the house paid off! ;0) How much extra would I have to send each month to pay it off in say, 5 years?

Thanks!
Sherry

Julie Rains's picture

It looks like you borrowed about $101,000 initially. If you paid $400 more per month, then you could pay off the loan in 5 years at year 12. That seems like a lot but it is b/c the interest is fairly low at this point. If you could refinance at 4% with no closing costs, then it looks like you could save about $30 per month (but you'd be forced to pay the higher amount every month, rather than keeping it optional). If you design an amortization schedule, then you can look at various options.

Guest's picture
Debi

I am wondering how making a double mortgage payment will help me. I've been in the house for 12 years. I rented at first and purchased in April-2000. The original 30-year loan was $176,302.00 with 8.75 interest. I have refinanced 3 times with the final interest rate of 5.375 and the balance was $174,557.03. It is still a 30-year loan.
Would it do me any good to make a double payment? I'm not concerned about paying off the mortgage soon because I really appreciate the interest deduction on my taxes and have no plans to move.
I'm thinking that making a double payment to principal only would reduce my payment which also reduces my interest to deduct.
So, it may be better to just continue my monthly payments as usual. Please give me suggestions.
Thank you very much.

Julie Rains's picture

Paying ahead on a traditional, fixed rate mortgage typically won't lower the mortgage payment; instead, you'll pay off the mortgage earlier (which is sort of lowering the payment after many years but that doesn't sound like what you want to do). Extra payments will lower the principal so that the outstanding loan balance is lower, and then more of each payment will be applied to the principal and less to interest but the payment remains the same. So, you will reduce your interest payment sooner and have less to deduct.

If you have a variable rate mortgage, then when the rate resets, the payment would be less than it would have been otherwise if you hadn't made extra payments. Or if you refinance, then you'll refinance on a lower balance.

Paying extra basically reduces the overall payments but it does tie up your money in the house.

Guest's picture
Debi

Thank you, Julie. I have determined that making a double payment to my 30-year mortgage will not really help me since I am not concerned about paying it off earlier.

One other question: I've heard that using a credit card to make your mortgage payments is a good idea. I'd like to have them charge my credit union VISA card which I pay off monthly. Do you agree that it is a good idea? And, what are the benefits?
I'm thinking of visiting my bank tomorrow and talk to them about doing so. Can you give me any tips? Will the bank charge me any fees to do so? I have a feeling the bank won't do it willingly. It originally required that I have the monthly mortgage automatically withdrawn from my checking account.
Again, thanks.

Julie Rains's picture

I have never paid my mortgage with a credit card, though I am a user of cc's b/c of rewards and  fraud protection. I would think that those would be the benefits of paying with a credit card (mainly greater reewards); those and a grace period from when you incurred the charges and when you actually have to pay the charges.

I would think that the bank that is servicing the mortgage can set the rules for how payments should be made, what forms of payment are acceptable, and if there are any fees involved. The bank may be like my utility company -- it accepts payments via cc but charges a fee. Actually I read up on this a bit -- the utility company figures it is not going to sell more energy by taking a credit card but it still incurs merchant fees so it passes the fee along to the consumer. I would think the same idea applies to the bank -- it doesn't gain more from you by accepting a cc so there may be some resistance. Or they may be happy to accept the card.

The bankers may also be concerned that someone is using a cc card to make a large payment (and possibly build a cc balance) but many won't make that connection: they'll just follow the policies.

Guest's picture
Debi

Good points, Julie. After I sent the email to you, I got to thinking that the bank may prefer accepting a debit card payment rather than a credit card. Since debit card is immediate, and virtually the same as a check. They are saying that checks will eventually become obsolete. I'll see what they say tomorrow.

Guest's picture
Debi

Hi Julie - Thought you'd be interested in what I learned yesterday at my mortgage bank. The two loan officers had never heard of paying your monthly mortgage with a credit card. The guy said he thought it was a good idea and "let's go ahead and do it". The woman was a little less inclined to go forward without calling corporate office. She did, and was told that they cannot do it right now. But, my idea was not a surprise to the corporate office. I'm pretty sure it is on the consideration table. The loan officer told me there will be some BIG changes in banking effective January 1st, and it may be possible in a couple months.

Guest's picture
Guest

So my brother lives a very fine life with lots of world travel and is mortgaged up to the hilt, my father is still saving money and using duct tape to repair his clothes even though he is in his eighties, and I am trying to maintain a sane path between these two extremes.

-it's nice to see people being honest about enjoying life vs. just saving Money. This articlehttp://www.bankapedia.com/mortgage-encyclopedia/faqs/691-what-is-the-advantages-and-disadvantages-of-a-15-yr-loan-vs-a-30-yr-loan-/a> says the same thing: Basically we are not robots you have to factor in enjoying life with the same importance you treat the numbers.

That being said financial peace of mind is something I'm guessing your father enjoys but your brother doesn't

Guest's picture
Guest

So my brother lives a very fine life with lots of world travel and is mortgaged up to the hilt, my father is still saving money and using duct tape to repair his clothes even though he is in his eighties, and I am trying to maintain a sane path between these two extremes.

-it's nice to see people being honest about enjoying life vs. just saving Money. This article

http://www.bankapedia.com/mortgage-encyclopedia/faqs/691-what-is-the-adv...

says the same thing: Basically we are not robots you have to factor in enjoying life with the same importance you treat the numbers.

That being said financial peace of mind is something I'm guessing your father enjoys but your brother doesn't

Guest's picture
Guest trish

what is the penalty for paying a 30year loan out after just 10 years , should banks or building societys advise you the best way to do this or is'nt it in their best interest.

Julie Rains's picture

You'd have to look at the loan documents to see if there is an early payment or prepayment penalty. Not all loans have a prepayment penalty but apparently some do.

Guest's picture
Guest Teresa

Just wandering what my best route would be in refinancing a 30 yr mortgage of 88,000 at 5.62 with 24 years left to pay. Now, thinking about getting a 30yr fixed at 5.0 for 100,000.00 to build a barn for farming investments. The extra money would build a barn & improve our place. Was looking at these options: home equity was too high for us, 15yr fixed at 4.375 was too high for us. The 30yr fixed at 5.0 for 100,000.00 seemed to be right for us, payments of 536.82 a month. We are 45 years old. Is this a bad route for us to take. We are building a horse barn for possible extra income coming in. We live in a location in East TN, where the income earnings are low. We thought about the extra payment, or extra money monthly option. What do you recommend? The barn would increase our property value & hopefully make extra money training & selling horses, or possible boarding. Any suggestions...Thank You, helpful site!
Teresa

Guest's picture
roy greer

we are trying to refinance to a 15 or even 10 year mortgage. We never expected to have a 30 year mortgage at our ages, IF THERE IS ANY ONE OUT THERE WHO COULD HELP USE WE WOULD GREATLT APPRECIATE IT. tHANK YOU cAROL AND roy

Guest's picture
roy greer

as said before we have a 30 year mortgage we are not youngsters, we would like to refinance at a lower interest rate and have a 15 to 10 year mortgage if possible. If anyone out there can hep us we would greatly appreciate it, God Bless You Carol and Roy

Julie Rains's picture

Make sure that the shorter term will actually benefit you, making your payments lower, which is presumably your goal. If you go to a shorter term, it's likely that your payments will be higher -- unless you have just a few years left on the 30-year mortgage (and will be spreading out the payments even longer) and/or have a fairly high interest rate now.

Guest's picture
Guest

Julie another well written informative article about loans. You out done yourself, again. http://www.fhalimit.com/ . Looking forward to reading your next.

Guest's picture
Brian

I am purchasing a new house in May 2010, and would like to know if it is better (in your opinion) to obtain a 30yr mortgage and make double payments, or to get a 15 yr mortgage and make one extra payment per year? I can manage the payments either way, but would like to know which way will save the most money, and time! Thank you.

Julie Rains's picture

Unless the 15-year mortgage has a dramatically lower interest rate than the 30-year mortgage, then you'll save interest and time by taking out the 30-year mortgage and making double payments. Mainly you'll save because you'll chip away at the principal faster and pay more each year ($25K vs. $20K approximately if you have a 5% fixed rate loan on $200K). The double payment will have you finishing the mortgage in less than 10 years. With the 15-year setup, you'll pay the loan off in 13.5 years.

Guest's picture
lori

I will be 50 yrs old next year and am looking at buying a condex. I have 82k in the bank and would like to put down 65k- 70k. I am looking to finance 160k. My child support is 450.oo per week and will expire in approximately 6 - 10 years. Because my child is special needs my salary is about 400.00 a week so as you can see half or more of the income is via cs.

Does it make more sense for me to go for a 15 yr or a 30 yr mortgage? The 30 yr no points is 4.875, with 2 points 4.375. The 15 yr with no points is 4.250 and with 2 points 3.750.

I don't know that I will ever make enough in my 60's that a tax deduction on interest is going to be a big deal to me. What do you think?

Does it make more sense to go for a 30 yr with the points and add extra money on when I can and try and put that extra few hundred away in a Roth?

Thank you for your time!

Julie Rains's picture

If you are going to finance $160K (the mortgage loan, not the price of the house) with an income of $850, then the only loan you could afford would be a 30-year loan with 2 points ($798) though you'll need to add in property taxes and insurance. Do you mean to buy the house for $160K and finance $100K?

Guest's picture
Freh

Ms. Julie Rains,

(Not sure if your still taking questions)
I have a split loan 80/20 first loan is $245,000 (5.8%) and the second is around $58,000 (8.5%) both are fixed rates. I'd like to pay it off quicker so what route makes sense or combination of payment options. Paying extra monthly or paying 1 extra payment at the end of the year or making biweekly payments. I'd really like to take care of the 2nd loan early b/c of the high interest rate. And refinancing is not an option b/c of the lack of equity in the house.

Julie Rains's picture

Freh, I'd guess that paying $100 extra per month on the larger loan will make the biggest dent in the loan balances. I'd need more information for a more precise, accurate response (such as the terms of the loans and how many payments you've made to date). Generally, there's a greater advantage to paying the higher rate loan plus paying more overall each year ($1200 vs. $455 per year), which in your case is paying the extra $100 per month.

Guest's picture
Heather

Ok Julie,
We are first time new homeowners, so new in fact, our first mortgage payment hasn't even been made yet (due the Apr 1). The loan we received was for $131,240 30 year fixed and 5% interest. We are working on one income right now, as I am a full time student, but will be graduating at the end of the year and going into the workforce at which time we will become a two income household and able to navigate paying extra (whether it be an extra payment yearly or extra monthly). What do you suggest for us as new homeowners who are still trying to figure all of the financial's out?

Julie Rains's picture

@Heather

Congrats on your new home and pending graduation. It's okay to take your time and think about how to approach your new (and upcoming) financial status as homeowners and two-income couple. Your first inclination may be to pay off the loan as soon as possible but I would consider the full financial picture: funding / paying off student loans, emergency funds, retirement, and home maintenance. The home maintenance issues can be bigger than you may realize so setting aside money soon is a great idea, and can help you avoid taking out a home equity loan for improvements.

When things get settled (I anticipate this time for you coming in a couple of years) -- unless you have loads of extra money now -- then start considering paying extra then. I think it's easier to pay a bit more every month, and work that into your budget, rather than a big chunk at a time; though different approaches work for different people.

One of the reasons I paid extra on my mortgage was b/c we had the extra money and I didn't want to waste surplus on too many extras and not enough essentials. So, it was as much as discipline thing as it was a need to pay off the mortgage.

Hope all goes well, keep us posted on progress!

Guest's picture
Ryan_D

How do you do the calculation of this?.... I just wanna know if I pay an extra 5,000 a year on my mortgage how soon will my mortgage be paid off. My mortgage is 163,000 (ball-park) and my APR is 4.333 with a 30 fixed rate.. I have ten years left in the military and my goal is to have the mortage paid off around the same time I retire.

Julie Rains's picture

You'll need to know how many years you have held the mortgage of the 30 years. If you design a 30-year mortgage schedule, then you can plug the extra payments in wherever you are month-years wise. The answer will depend on whether you have 29 years left or 15 years left, for example. If you can let me know, then I could help you figure that out -- how soon the pay off will be.

Guest's picture
Guest

The best thing to do is to take your monthly payment, divide it by 12, and add that amount- or more- to your monthly payment. Set up your payment, including the extra principal, to be deducted automatically from your checking account each month. You will save a bit of interest by making the extra payment every month instead of at the end of the year. Also, If you have to write a check, you will be tempted to skip making the extra payments whenever you are a little short on cash. This way, it becomes automatic. Also, if you wait until you are several years into your mortgage, the benefits will be much, much, less. If you refinance to get a better interest rate, or move to a new house, add enough extra principal so that your mortgage will be paid off when the original mortgage would have been paid off. You won't save money if you add extra years of mortgage payments. It is best to actually run the numbers so you can see how it will apply to your situation. Sometimes people say to me "but I don't plan to live here that long, so it doesn't matter if I pay off my house 5 years early". It does matter. When you make extra mortgage payments, your loan balance goes down faster. When you sell, your equity will be higher, you will get more from the sale to make a bigger down payment on your new house, and then you apply the same strategy of making extra principal payments to your new house. A 15 mortgage is great, and usually has a better interest rate, but you are locked into higher payments. What if you lose your job? You could get a 30 year mortgage but make payments high enough to pay it off in 15 years, so that you could reduce the payments in an emergency. By the way, I am a CPA.

Guest's picture
Maddy Han

I think there is a major flaw in your logic. From the question, you could probably assume that the extra $100 or the extra loan payment added up to the same amount. (Her extra loan payment was $1200 per year.)

Guest's picture
lrao

hello Julie. Glad I found your blog.
Here is my situation. I own a condo in boston; lived there for four years. Refinanced last year to a current rate of 5.375% on a 30 yrs fixed. Now, interest rates have fallen. However a) my home is now a rental - I moved overseas and rented it out and, b) I am stuck overseas at least for six months and cannot refinance to a lower market rate. I heard that I could get a low 4s rate on an investment property, however I cannot be there for the closing. Getting a POA is too complicated (need signatures from a US consulate - none in my city where I live currently).
So..... I am wondering if paying off extra each month is good to get my principal down a bit and not worry about refinancing right now. Granted, a refi would reduce my monthly payments, but of course I would be paying interest again for a few years and not chipping down the principal at all.
Does it make sense for me to pay an extra hundred each month if the mortgage co. allows it? or make a lumpsum payment of 5k or so and then do a 100 a month? thanks.

Guest's picture
illuminus

Could you explain how to factor in having an offset account with the homeloan with the mortgage acceleration, especially if you are on a continually increasing salary as years pass, so I guess that would be classed as a variable and somehow have a formula put in, sounds bit of a headache for me to do, unless I am missing something. By the way the spreadsheet is brilliant!!!

Julie Rains's picture

When I first wrote these articles on amortization, it was partly in response to those who seemed to think that the mortgage acceleration products and the HELOC would be helpful to accelerate the mortgage payoff. Those provide marginal benefit (to the actual mortgage payoff process, they may benefit those who have difficulty with budgeting and controlling spending); and a spreadsheet would most likely have to be developed that accounted for every single day of your mortgage (rather than 360 months in a 30-year mortgage). It would be easier then for you to create your own schedule and update it as you go along.

Guest's picture
Guest

Do you have online calculators for both the $100/month extra and 1 payment/year extra? I'd like to run our numbers. Or, if you can run our numbers, we'd appreciate it greatly:

Current loan balance: $309886.84
Interest Rate: 3.75%
29 years (of 30 year loan) remaining.
Principle and Interest: $1466.33
Escrow: $651.67
Total Payment: $2118.00 (Includes PMI: $284)

Julie Rains's picture

There is a downloadable amortization schedule in this post (look for "one file") http://www.wisebread.com/diy-mortgage-acceleration.

At first glance, I would say that paying $2118 once a year until the loan is paid off would accelerate the payoff faster than paying $1200 yearly in $100 monthly increments. But since I enjoy doing spreadsheets (plus I like to check my intuition, b/c it is not always right), I plugged in numbers to my spreadsheet and found that the extra monthly payment at the end of the year pays off the loan in 25 years whereas the $100 extra pays off the loan in slightly less than 27 years.