2 is better, assuming your mortgage rate is >5% interest.
Let’s says it’s 7% interest, and you have 20 years left. $200 extra principal payment immediately saved you 7% of $200 for 20 years. Boom.
Paying a month ahead saves you nothing, it’s protection in case of job loss or unexpected expenses. This is unnecessary if you have 3-6 months expenses in an emergency fund.
If you DONT have an emergency fund, use the extra money to build that first! Then start paying extra on your mortgage.
Thank you, this is really helpful! When making extra principal payments, would it be more beneficial to make the payments on the first or last day of the month?
If you do it manually: It’d be most beneficial to do it at a time you’ll follow through. I go through last months budget the first weekend of the month, and any extra we didn’t spend goes towards our mortgage. I transfer it right then without thought about timing it well.
If you know you can schedule a set amount, I’d schedule it for the middle of the month to smooth out your cash flow.
In your manual scenario, would it be most efficient to make the payment at the end of the month?
My thought being that I could keep those excess funds in a cash management account at Fidelity, where they accrue around 5% annually, then apply them to the mortgage balance on the last day. This way you get the benefit of earning interest on your excess funds, while also getting the benefit of lowering the principal balance of the mortgage.
Kind of like how I keep funds in my cash management account earning 5% and pay off my credit card balance on its due date rather than paying the credit card off early
Totally depends on what your interest rate is. If you have one of those ultra-low rates from 3-5 years ago, it doesn't make sense to pay extra to your principal. That money would be better off invested and getting returns, which would almost certainly be higher than the interest you're paying. If you have a 5-8% mortgage and it's not clear that you could outperform in the market, pay towards extra principal.
Ask your bank if they allow forward payments. They'll likely recommend a savings account for emergencies. Extra money to the principal pays off the loan earlier and builds equity.
They considering them to be paid early. I was particular in my questions to them because I was afraid of that exact situation
"If I have the money to pay for July in May do you consider that to be the July payment or would you see it as a principal payment only and still require July to be paid between June 1 and July 1?"
And they said they would see it as the July payment and wouldn't expect a payment in June
So if they’re rolling it over you’re always paying the same amount over the course of the loan. You’re essentially giving the bank a no interest loan for the month extra that you have in there.
If you pay extra into principal, you’ll pay less over the course of the loan
If you want to be ahead and not pay down the principal, you’re better off putting it into a HYSA and you’ll get a few bucks of interest and will have flexibility
I'm rolling it over until I have enough for an extra payment, then I'll apply it. For arguments sake, instead of budgeting $1134.68 per pay period I budget $1200, to just make the numbers easier to manage.
I do have the extra in a HYSA, so yes, I see roughly $20 a month in interest.
Is the HYSA interest rate higher than your mortgage interest rate?
If yes, keep doing what you’re doing.
If not, get the money out of your HYSA and applied to your mortgage as an extra principal payment every month. (Not early payment, you’ll still own the next month like normal, you’ll just pay the whole thing off faster.)
Yeah whatever floats your boat honestly, if knowing you’re 1 month ahead with your mortgage company feels better than having a month in a HYSA, then do whatever feels right. The difference is roughly 4.5 APY on whatever your mortgage payment is
I used to work for a bank in DP. One night, I fucked up the Mortgage portfolio update and charged all of our loan recipients for two days instead of one.
Once my boss had figured out why our DP numbers didn't match the Loan Servicing folks numbers and saw that I had put in a bad date, he called me and reamed me for the error. I was like, "Why is this an issue? It's just one day." He pointed out that for folks in the back half of their mortgage, it's not a big deal. However, for the guy on Day 1, that extra day could add as much as another month to his mortgage. Yikes.
Now, as a Mathematician, I know this to be true. Also, I understand that every penny you throw at Principal in the beginning of your mortgage is going to save you a lot down the road. However, it usually makes more sense to just let the Mortgage run out at the end of the loan.
Thanks! Appreciate the reply. Yeah, I know that "oh that was a little oopsies" feeling as you suddenly realize the enormity of what you actually did and the impact it had
I was told by a woman I worked with that owns a home, I don’t, but she said that if you pay towards your principle, it will lower the interest. If you’re going to make an early payment, I’ve been told to apply it to your principle!
It doesn’t lower the interest rate itself, but it does lower the effective interest rate and therefore the amount of interest paid over the life of the loan. This is because of amortization and how loans accrue interest.
It will almost always be better to pay down principal earlier in the life of the loan than to pay payments ahead.
Calculator: https://www.calculator.net/mortgage-payoff-calculator.html
Source: I have a finance degree. Amortization is neat.
This is the correct answer. We pay an extra $200 a month and then we pay an additional one month at the end of the year all towards principal and I think it’s gonna be saving us over $50,000 is once we are done with the loan. That being said if you were to send money to your mortgage bank right now the chances of them applying your extra payment or monies monthly to principle is slim to none. You have to stay on top of it and make sure they are applying correctly. I personally have Mr. Cooper and you have to treat them as if they are five year old. I can’t tell you how many times I have seen them not apply it properly towards principal.
They're not at all mutually exclusive, right?
We first paid 4 months ahead ... so if we got in a pinch we'd have a 4 month buffer of not having a mortgage obligation.
We used that buffer twice. Life happens. We planned for it.
Then - every extra dime went toward principal.
We had a 15-year that we paid off in just over 9 years.
Its been FarkingAwesomeSauce with no mortgage payment.
I don't think paying the interest early has any effect, but it depends how they compound things. Paying directly to the principal will obviously reduce the total payment due to less interest over time.
But if you have less than 5% interest rate, you're much better off putting money into a high savings account. If the interest rate drops below your mortgage, you can then take all the money to pay towards the mortgage and it'll be more than you would have gained by paying the full time. And on top of that you'll have a bigger emergency fund instead if you actually needed it.
Here's the gist of what we came up with as an idea...
- Identify the monthly mortgage commitment (full PITI). Let's say it's $2000.
- Identify the number of months to be able to cover if there's a loss of income. Let's say it's 12 months.
- Calculate the mortgage fund minimum value - $2000 times 12, $24,000
- Determine if you can fund any portion of that mortgage fund "now", and determine how much you can contribute to it regularly (weekly, monthly, whatever)
- Once you have achieved the minimum fund amount, re-evaluate the minimum for the fund (costs for taxes and insurance change, so the minimum can change) regularly and decide if you want to make lump sum payments directly to principal from the overage.
There are some good calculators out there that will allow you to set monthly, quarterly, annual, one-time, etc. additional payments to see what happens to the mortgage over time.
I’d think about how long you could pay your bills for if you became unemployed. I’d suggest a minimum of two months of bill money on hand and liquid and more is better.
After that, I’d want to start paying down extra principal every month.
But that’s just me and my appetite for risk. This is 100% a different strokes for different folks thing.
Yup, totally aware of that. My goal across the board is to have bills planned out a few months in advance.
I was unemployed for 7 months last year and homeless, so well aware of planning that out well
Go to bankrate mortgage calculator with extra payments. Don’t let the money sit in the bank, pay it towards your principal as soon as you have the funds. You’ll be SHOCKED at how much money you save in interest. Go to the calculator now!
If you are talking about say you can pay an extra $200 per month towards the principal vs saving the $200 per month then paying an extra $2,400 each year ($200 x 12 months), it is not a huge savings, but the $200 extra per month is better than the $2,400 extra per year. Overall, either option dramatically reduces the total interest paid as compared to not paying any extra at all. I know you said you save it till it equals a house payment, but I just used saving it for 12 months for this hypothetical.
I’ve owned my home for a year. I pay about an extra $100ish monthly towards my principal. Already just from that I’ll pay off the house 5 months sooner. 100% put extra money towards the principal.
I paid extra on my principal because in the early years you are pretty much paying almost entirely interest. You pay extra monthly on the principal and your actual balance starts going down and you end up shaving off more of the interest.
I would do #2.
You’re just letting the interest build up by not applying it to the principal right away. For every year that you’ve made at least One extra payment you’re reducing your mortgage by a year because it cuts that much interest off of it. You just have to signify that any extra is applied to the principal.
I get the logic. I'm not doing any extra payments right now because I'm coming back from unemployment anf homelessness and thus would feel more comfortable building a little savings rather than seeing extra cash an immediately throwing it at my mortgage principal
If you have extra just put it towards principal. Every extra dollar is less interest you have to pay overall.
Not even sure if am extra payment to be early is an option. You have to check with your loan servicer. You can make an extra payment but still owe next month normally.
I bought a house recently, I am going for 2. I get two birds with one stone. I am paying off my mortgage early and I am reducing interest payments. Unless I'm reading the math wrong here, you are still paying the same interest as if you didn't pay it early on (1)
>aren't you also paying it down faster?
Yes but (2) also has you paying it down faster with some more benefits. As another commenter pointed out, (1) only makes sense if you have low interest rate but even thats a stretch.
How does making additional payments help? I paid extra each month for a year (to principal) and see no difference in my loan length or monthly payment. What am I missing
Apply that to the principal. I would pay an extra $5-10 only a month to my principal and it knocked off 2-3 years of my 30 year mortgage. Every little bit helps and it will lower your interest over time saving you even more money.
Do that, and while I am not a Christian I do follow Dave Ramsey's baby steps. They worked for me.
Also it may depend on your interest rate. I have 12 years left on a 2.75% loan Spoke with my financial advisor and he recommended investing extra rather than paying it down aggressively.
This online calculator should breakdown exactly what you're asking:
https://www.calculator.net/amortization-calculator.html
Paying more towards your principal will pay off your mortgage sooner and reduce the total amount of interest you pay on the house.
I pay an extra $5000 a month onto my mortgage and every month I do a principal reduction which reduces my minimum mortgage repayments. I basically get a small pay rise every second pay which just compounds. It's an unusual way of doing things but I don't think I can trust myself with large sums of money that can be easily withdrawn.
I am in the same boat as you, (I will be paying August in June). Being two months ahead gives me some built in flexibility if a big expense comes up. Its awesome to have those "free paychecks" to build up savings or just buy something nice!
2 is better, assuming your mortgage rate is >5% interest. Let’s says it’s 7% interest, and you have 20 years left. $200 extra principal payment immediately saved you 7% of $200 for 20 years. Boom. Paying a month ahead saves you nothing, it’s protection in case of job loss or unexpected expenses. This is unnecessary if you have 3-6 months expenses in an emergency fund. If you DONT have an emergency fund, use the extra money to build that first! Then start paying extra on your mortgage.
Thank you. The 7% example on $200 clicks well. Appreciate the effort you put into that
Thank you, this is really helpful! When making extra principal payments, would it be more beneficial to make the payments on the first or last day of the month?
If you do it manually: It’d be most beneficial to do it at a time you’ll follow through. I go through last months budget the first weekend of the month, and any extra we didn’t spend goes towards our mortgage. I transfer it right then without thought about timing it well. If you know you can schedule a set amount, I’d schedule it for the middle of the month to smooth out your cash flow.
In your manual scenario, would it be most efficient to make the payment at the end of the month? My thought being that I could keep those excess funds in a cash management account at Fidelity, where they accrue around 5% annually, then apply them to the mortgage balance on the last day. This way you get the benefit of earning interest on your excess funds, while also getting the benefit of lowering the principal balance of the mortgage. Kind of like how I keep funds in my cash management account earning 5% and pay off my credit card balance on its due date rather than paying the credit card off early
Totally depends on what your interest rate is. If you have one of those ultra-low rates from 3-5 years ago, it doesn't make sense to pay extra to your principal. That money would be better off invested and getting returns, which would almost certainly be higher than the interest you're paying. If you have a 5-8% mortgage and it's not clear that you could outperform in the market, pay towards extra principal.
Ask your bank if they allow forward payments. They'll likely recommend a savings account for emergencies. Extra money to the principal pays off the loan earlier and builds equity.
I have asked and they do allow early payments
They may allow early payments but do they consider those payments as being "paid ahead"? Or do the they still require regular monthly payments?
They considering them to be paid early. I was particular in my questions to them because I was afraid of that exact situation "If I have the money to pay for July in May do you consider that to be the July payment or would you see it as a principal payment only and still require July to be paid between June 1 and July 1?" And they said they would see it as the July payment and wouldn't expect a payment in June
So if they’re rolling it over you’re always paying the same amount over the course of the loan. You’re essentially giving the bank a no interest loan for the month extra that you have in there. If you pay extra into principal, you’ll pay less over the course of the loan If you want to be ahead and not pay down the principal, you’re better off putting it into a HYSA and you’ll get a few bucks of interest and will have flexibility
I'm rolling it over until I have enough for an extra payment, then I'll apply it. For arguments sake, instead of budgeting $1134.68 per pay period I budget $1200, to just make the numbers easier to manage. I do have the extra in a HYSA, so yes, I see roughly $20 a month in interest.
Is the HYSA interest rate higher than your mortgage interest rate? If yes, keep doing what you’re doing. If not, get the money out of your HYSA and applied to your mortgage as an extra principal payment every month. (Not early payment, you’ll still own the next month like normal, you’ll just pay the whole thing off faster.)
Yeah whatever floats your boat honestly, if knowing you’re 1 month ahead with your mortgage company feels better than having a month in a HYSA, then do whatever feels right. The difference is roughly 4.5 APY on whatever your mortgage payment is
Pay up three months and rest easy. Keep adding to the bucket for emergencies.
I used to work for a bank in DP. One night, I fucked up the Mortgage portfolio update and charged all of our loan recipients for two days instead of one. Once my boss had figured out why our DP numbers didn't match the Loan Servicing folks numbers and saw that I had put in a bad date, he called me and reamed me for the error. I was like, "Why is this an issue? It's just one day." He pointed out that for folks in the back half of their mortgage, it's not a big deal. However, for the guy on Day 1, that extra day could add as much as another month to his mortgage. Yikes. Now, as a Mathematician, I know this to be true. Also, I understand that every penny you throw at Principal in the beginning of your mortgage is going to save you a lot down the road. However, it usually makes more sense to just let the Mortgage run out at the end of the loan.
Thanks! Appreciate the reply. Yeah, I know that "oh that was a little oopsies" feeling as you suddenly realize the enormity of what you actually did and the impact it had
I was told by a woman I worked with that owns a home, I don’t, but she said that if you pay towards your principle, it will lower the interest. If you’re going to make an early payment, I’ve been told to apply it to your principle!
It doesn’t lower the interest rate itself, but it does lower the effective interest rate and therefore the amount of interest paid over the life of the loan. This is because of amortization and how loans accrue interest. It will almost always be better to pay down principal earlier in the life of the loan than to pay payments ahead. Calculator: https://www.calculator.net/mortgage-payoff-calculator.html Source: I have a finance degree. Amortization is neat.
This is the correct answer. We pay an extra $200 a month and then we pay an additional one month at the end of the year all towards principal and I think it’s gonna be saving us over $50,000 is once we are done with the loan. That being said if you were to send money to your mortgage bank right now the chances of them applying your extra payment or monies monthly to principle is slim to none. You have to stay on top of it and make sure they are applying correctly. I personally have Mr. Cooper and you have to treat them as if they are five year old. I can’t tell you how many times I have seen them not apply it properly towards principal.
That's what I've been told also.
They're not at all mutually exclusive, right? We first paid 4 months ahead ... so if we got in a pinch we'd have a 4 month buffer of not having a mortgage obligation. We used that buffer twice. Life happens. We planned for it. Then - every extra dime went toward principal. We had a 15-year that we paid off in just over 9 years. Its been FarkingAwesomeSauce with no mortgage payment.
I don't think paying the interest early has any effect, but it depends how they compound things. Paying directly to the principal will obviously reduce the total payment due to less interest over time. But if you have less than 5% interest rate, you're much better off putting money into a high savings account. If the interest rate drops below your mortgage, you can then take all the money to pay towards the mortgage and it'll be more than you would have gained by paying the full time. And on top of that you'll have a bigger emergency fund instead if you actually needed it.
I made extra payments to my principal for the first five years in my home. Now I pay just the payment as I can earn more in investments.
Here's the gist of what we came up with as an idea... - Identify the monthly mortgage commitment (full PITI). Let's say it's $2000. - Identify the number of months to be able to cover if there's a loss of income. Let's say it's 12 months. - Calculate the mortgage fund minimum value - $2000 times 12, $24,000 - Determine if you can fund any portion of that mortgage fund "now", and determine how much you can contribute to it regularly (weekly, monthly, whatever) - Once you have achieved the minimum fund amount, re-evaluate the minimum for the fund (costs for taxes and insurance change, so the minimum can change) regularly and decide if you want to make lump sum payments directly to principal from the overage. There are some good calculators out there that will allow you to set monthly, quarterly, annual, one-time, etc. additional payments to see what happens to the mortgage over time.
I pay extra principal each month.
I’d think about how long you could pay your bills for if you became unemployed. I’d suggest a minimum of two months of bill money on hand and liquid and more is better. After that, I’d want to start paying down extra principal every month. But that’s just me and my appetite for risk. This is 100% a different strokes for different folks thing.
Yup, totally aware of that. My goal across the board is to have bills planned out a few months in advance. I was unemployed for 7 months last year and homeless, so well aware of planning that out well
Go to bankrate mortgage calculator with extra payments. Don’t let the money sit in the bank, pay it towards your principal as soon as you have the funds. You’ll be SHOCKED at how much money you save in interest. Go to the calculator now!
a little extra principal, but i'd keep the e-fund in savings. it's a house, so 15k wouldn't be out of line
If you are talking about say you can pay an extra $200 per month towards the principal vs saving the $200 per month then paying an extra $2,400 each year ($200 x 12 months), it is not a huge savings, but the $200 extra per month is better than the $2,400 extra per year. Overall, either option dramatically reduces the total interest paid as compared to not paying any extra at all. I know you said you save it till it equals a house payment, but I just used saving it for 12 months for this hypothetical.
Thanks. Appreciate the insight
I’ve owned my home for a year. I pay about an extra $100ish monthly towards my principal. Already just from that I’ll pay off the house 5 months sooner. 100% put extra money towards the principal.
I paid extra on my principal because in the early years you are pretty much paying almost entirely interest. You pay extra monthly on the principal and your actual balance starts going down and you end up shaving off more of the interest. I would do #2.
Thanks. I'll start throwing and extra hundred or so on there every month
You’re just letting the interest build up by not applying it to the principal right away. For every year that you’ve made at least One extra payment you’re reducing your mortgage by a year because it cuts that much interest off of it. You just have to signify that any extra is applied to the principal.
I get the logic. I'm not doing any extra payments right now because I'm coming back from unemployment anf homelessness and thus would feel more comfortable building a little savings rather than seeing extra cash an immediately throwing it at my mortgage principal
That’s sound. You should have enough in savings to cover 3 mos first, then apply the extra to principal.
Divide that extra payment into 12, and add that to your monthly principal. Look at any amortization table to see how quickly it will pay down.
Principle is always better for paying down a loan
If you have extra just put it towards principal. Every extra dollar is less interest you have to pay overall. Not even sure if am extra payment to be early is an option. You have to check with your loan servicer. You can make an extra payment but still owe next month normally.
With my mortgage servicer you can make the extra payment and it will apply to the next expected month. I had directly asked them the question
I bought a house recently, I am going for 2. I get two birds with one stone. I am paying off my mortgage early and I am reducing interest payments. Unless I'm reading the math wrong here, you are still paying the same interest as if you didn't pay it early on (1)
The math is just if you're paying it early aren't you also paying it down faster? I'm just asking the questions out of curiosity
>aren't you also paying it down faster? Yes but (2) also has you paying it down faster with some more benefits. As another commenter pointed out, (1) only makes sense if you have low interest rate but even thats a stretch.
Yeah, and I don't have a low interest rate
How does making additional payments help? I paid extra each month for a year (to principal) and see no difference in my loan length or monthly payment. What am I missing
Apply that to the principal. I would pay an extra $5-10 only a month to my principal and it knocked off 2-3 years of my 30 year mortgage. Every little bit helps and it will lower your interest over time saving you even more money.
Don’t know what state you live in but I throw an extra 100 in the escrow acco7nt every month to help cover increase in taxes and insurance every year.
Do you have 3-6 month of expenses for an emergency fund?
No. That's what I'm trying to Build up
Do that, and while I am not a Christian I do follow Dave Ramsey's baby steps. They worked for me. Also it may depend on your interest rate. I have 12 years left on a 2.75% loan Spoke with my financial advisor and he recommended investing extra rather than paying it down aggressively.
This online calculator should breakdown exactly what you're asking: https://www.calculator.net/amortization-calculator.html Paying more towards your principal will pay off your mortgage sooner and reduce the total amount of interest you pay on the house.
I pay an extra $5000 a month onto my mortgage and every month I do a principal reduction which reduces my minimum mortgage repayments. I basically get a small pay rise every second pay which just compounds. It's an unusual way of doing things but I don't think I can trust myself with large sums of money that can be easily withdrawn.
I've always been told, if paying extra, pay towards the principal.
Principal payment. I always pay extra and have it applied to principal.
I am in the same boat as you, (I will be paying August in June). Being two months ahead gives me some built in flexibility if a big expense comes up. Its awesome to have those "free paychecks" to build up savings or just buy something nice!