another question about paying down mortgage

[crabbypatty]

I know that some people do not feel that it is the wisest financial decision, but it is one that we are comfortable with. It's a psychological weight to us and we have no other outstanding debt at the moment.

I think I remember reading (maybe a thread here?) that there is a point of diminishing returns on paying your mortgage early. Of course by paying principal you will always avoid intrest on that money; but doesn't there comes a point where adding to the principal doesn't shorten the term that much? B/c of the ratio of intrest/principal.

So my question is where is that point? When you are paying about half intrest/half principal? 25% intrest/75% principal?

[pearlieq]

Check your lender's website and/or your original mortgage documents. There should be an amortization schedule in there that shows you how your payment will be allocated.

If you can't find that, use an online calculator to run your own. Make sure you use the original start date of the loan.

[Ima saver]

I really don't know the answer. I do know that I paid every extra dime I had on my mortgage and got it paid off when I was about 32. I have had a few new homes since then, but always built them free and clear.
You do save a lot in interest, no closing cost, no PMI. The feeling is worth money too!!

[jIM_Ohio]

Originally Posted by crabbypatty

I know that some people do not feel that it is the wisest financial decision, but it is one that we are comfortable with. It's a psychological weight to us and we have no other outstanding debt at the moment.

I think I remember reading (maybe a thread here?) that there is a point of diminishing returns on paying your mortgage early. Of course by paying principal you will always avoid intrest on that money; but doesn't there comes a point where adding to the principal doesn't shorten the term that much? B/c of the ratio of intrest/principal.

So my question is where is that point? When you are paying about half intrest/half principal? 25% intrest/75% principal?

The issue you are dealing with is the "size" of the extra payment relative to two factors 1) original payment amount and 2) principal balance remaining

Look at the ammortization schedule. If you can afford to pay"next months principal", you will do better than if you can only send $100. Meaning your return is higher if you can send a higher extra amount. The more you send, the more you save (you are effectively doing compounding in reverse).

Larger payments early in loan do better than smaller payments late in loan. Even smaller payments early could do better than larger payments late, depending on size of the payments. Best return is on early extra payments.

I have an ammortization schedule spreadsheet I downloaded from Microsoft's web site... this would help you see your specific situation. Handles extra payments and allows "if then" type situations.

The difference between me sending $1250/yr and $2500/year was ~9 months (loan would be paid off in 311 months with one, and ~320 with other).

If I could have afforded larger payments earlier, this changes significantly.

[Scanner]

I think you are referencing a comment I made but I don't have a calculator to specifically point you to.

My original comment was something like, "If you send an extra $100/month towards your prinicipal, you will save something like 7 years on a 30 year mortgage. If you send an extra $200/month, you'll save 11 years, an extra $300, 11.9 years, and extra $400/month, 12.3 years, and so on."

You see how the goal gets not much closer the more you add?

My point was, you get to a point where you are losing the psychological benefit of paying down the mortgage because the time to retiring that debt is getting diminishingly smaller.

So optimally, I think. . .a little extra a month is the best, not a lot extra, if that makes any sense.

But yes, JimOhio is correct - the more you send, the more you save, and the less time it is to retire your mortgage.

Don't let me discourage you from your goals one way or another. I'm the guy with the tanked silver this week, LOL.

I actually send no extra but just do a bi-monthly 1/2 payment vs. a monthly payment. That in of itself has seemed to knock a few years off of it, maybe 4 or 5 on a 25 year mortgage.

[Scanner]

BTW, a disclaimer - even though my silver tanked, it appears that the ETF that tracked a REIT has been really down too - so I was right to hold off on real estate too.

[kv968]

Originally Posted by Scanner

BTW, a disclaimer - even though my silver tanked, it appears that the ETF that tracked a REIT has been really down too - so I was right to hold off on real estate too.

You win some, you lose some

[jIM_Ohio]

I am down about 4-7% across all accounts. what I get for being 100% stocks, let's see what it looks like when dividends get posted in June.

[sweeps]

Yeah, so much for diversification... Practically all assets are down. Unless you happen to be holding Japanese yen.

[jIM_Ohio]

Originally Posted by Scanner

I think you are referencing a comment I made but I don't have a calculator to specifically point you to.

My original comment was something like, "If you send an extra $100/month towards your prinicipal, you will save something like 7 years on a 30 year mortgage. If you send an extra $200/month, you'll save 11 years, an extra $300, 11.9 years, and extra $400/month, 12.3 years, and so on."

You see how the goal gets not much closer the more you add?

My point was, you get to a point where you are losing the psychological benefit of paying down the mortgage because the time to retiring that debt is getting diminishingly smaller.

So optimally, I think. . .a little extra a month is the best, not a lot extra, if that makes any sense.

But yes, JimOhio is correct - the more you send, the more you save, and the less time it is to retire your mortgage.

Don't let me discourage you from your goals one way or another. I'm the guy with the tanked silver this week, LOL.

I actually send no extra but just do a bi-monthly 1/2 payment vs. a monthly payment. That in of itself has seemed to knock a few years off of it, maybe 4 or 5 on a 25 year mortgage.

I blogged this earlier today... check out the calculations.

[MonkeyMama]

It does really depend, but early in the mortgage a good target is about 1.5 extra payments per year. Or add an extra 12.5% of the total payment every month. This is a sweet spot where you pay the least to decrease the remaining time the most. This could depend on interest rate a bit - this is assuming 6%, 30 years, etc.

Jim's blog alluded to the point that the earlier you start the better. 20 years into a mortgage, will not help so much. In the first few years will mean much more.

[cschin4]

Go to bankrate.com or your bank and get a copy of the amortization table on your loan term and amount. Our loan was $130K for 30 yrs. After we took out the loan I printed out the amortization table. I was shocked to see that we would need even hit the 50%principle/50% interest until about the 20 th year of the loan. Prior to that, all mortgage payments were greather than 50% interest. Over the life of this loan we would have paid back the $130K principal AND another $151K just in interest!! This convinced us personally that we wanted to pay it off. And, the earlier you begin paying, the more interest you will save. We put every extra dime toward the mortgage and paid off our home in less than 5 years and are now quite happy we did so.

[smooper]

With all of the info from this site, if all goes as planned, we will have no mort. in 16 months. Considering we have no othe outstanding debt as of now, the mortgage is important for us. Mortgage professor.com also has easy to use calc's to create your own paln. Our balance is dropping at an alarming rate right now!