Creative Way of Pay off Mortgage -- Math Question?

[Preston]

I'm curious as to how much money this would save:

Our current mortgage payment is $650. (includes escrow) About $475 is actually principal/interest payment. I will not pay less than $700 monthly on it. But in 2011 we will be down to having the mortgage as our only debt, on top of having a growing EF.

So I was thinking -- in order to pay off the mortgage faster -- of adding $100 per month to the $700. so in other words Jan - $800, Feb $900, March $1000.. etc..

This will not break our budget, even in December. But it will cause me to tighten up for the holidays :-).

The balance on the mortgage will be around $80000 when we start this. 5% interest. 30 year mortgage but I doubt we will have it even 10 years.

I don't know how to put this into a mortgage calculator, but I'd be interest in how much money it would save overall and yearly interest.

[MomToTwoBoys]

It depends on your mortgage terms. Most mortgage companies only allow you to pay more into the principle amount at the time of refinancing. We have a 4.49% 5-year fixed rate 25-year amoritization mortgage in which we pay $333.74 biweekly and in the five years we've had it, we managed to knock a few years off of it. As of December 31st, we have 17 years and 2 months left on it.

Imo, I'd see about changing the payment terms to biweekly and when you can put more onto the principle amount.

[Preston]

We have Bank of America. The cretins want to charge extra for bi-weekly payments so that is out of the question. But there are no prepayment penalties.

[xtena]

US or Canada? In the US you can pay extra on the principle on most standard fixed loans unless you made the mistake of signing papers that included a prepayment penalty, but we made sure ours did not. We paid off our house in less than 5 years. Our loan was through Countrywide (yikes I know but they never gave us any guff) and I set it up for manual online payment, so each month I would pay as much as we could, sometimes double or triple the actual payment amount, designating all extra towards principle.

[Russ]

Would the calculator at DR's site help you?
http://www.daveramsey.com/tools/mortgage-calculator/

or I can send you an Excel file that you can enter extra payments at any time, any amount.

[Preston]

I need help with the math on this. There are NO prepayment penalties and I could pay off the loan tomorrow if I had the funds. I am not worried about any of that. I'd like to know what kind of $$ this will save if I do it every year.

[Preston]

Using mortgage calculators and the average extra payment of $650/month has me knocking the mortgage out in about 9 years, saving $57,955 in interest. The mortgage would be paid April 2018. But this is going to be off since I'd progressively be adding the amount instead of doing the same amount every month.

[Ceashels]

You might need to plug in the numbers one month at a time and get a new balance for the next month since you are changing your payment. I don't know if any of the available mortgage calculators online can calculate such a flexible payment plan.

[Greebo]

Ok - you said your payment is 475. To get to 475 P&I at 5% on an 80000 base I found that 24 years left got me to 477.52, so I'm using that as my starting point.

Now you talked about 650 but that included escrow - you didn't give the actual escrow amount, however - so I can't tell if you're paying anything extra right now. LATER, however, you talked about making a mortgage payment of $650/month saving you big - but the mistake there is you're not making a mortgage payment of 650 you're making a mortgage payment of 475 and an escrow payment of 175.

Another issue with your approach is the adding of another $100/month every month - until when? You don't say? You cannot do that forever - you have to have an upper limit.

A more realistic approach is to decide how much extra you will pay each month at a flat level and simply keep that up. So I'm going to run a number of scenarios

If your mortgage balance is 80,000 at 5% and you have 24 years left on the mortgage, and your P&I payment (which NEVER CHANGES by the way) is $477.52, and you add $100/month to the payment, then you will save $17,964 in interest and pay off the loan in 2027 - 17 years. (Remember the $477.52 excludes escrow - but you'll have to keep paying escrow too - that just has no impact on the mortgage itself).

If you add $200/month you'll save $27,170 and pay off in 2023 - 13 years.

$300/month save $32,833 payoff 2021.
$400/month save $36,686 payoff 2019.
$500/month save $39,483 payoff 2018

As you see, there are diminishing returns to paying extra. NOT that you SHOULDN'T pay as much as possible - the returns are ALL positive - but you get your biggest bang for the buck in the first few hundred extra (27k - 18 and 9k) but the next $300 don't even match the first $200 (12k saved over $300 vs 27k saved over the first $200)

[LynnLC]

No advice just wish my mortgage was $650. In my state it's unheard of..

[monkeywrangler71]

Preston, get the excel sheet from rcannon. After you input the original terms it spits out a list of every payment for the life of the mortgage. You can adjust your payment amounts in that and it will show you the impact of each change.

I use it all the time to weigh out different scenarios.

[Russ]

Actually did a little searching around the web and there are copies available for download for free and the do seem to be a bit more up to date looking.
.

Download HERE

Image capture...

[Preston]

Ok - you said your payment is 475. To get to 475 P&I at 5% on an 80000 base I found that 24 years left got me to 477.52, so I'm using that as my starting point.

Now you talked about 650 but that included escrow - you didn't give the actual escrow amount, however - so I can't tell if you're paying anything extra right now. LATER, however, you talked about making a mortgage payment of $650/month saving you big - but the mistake there is you're not making a mortgage payment of 650 you're making a mortgage payment of 475 and an escrow payment of 175.

Another issue with your approach is the adding of another $100/month every month - until when? You don't say? You cannot do that forever - you have to have an upper limit.

A more realistic approach is to decide how much extra you will pay each month at a flat level and simply keep that up. So I'm going to run a number of scenarios
)

Thanks, you took the bait :-).

The actual P&I is 466.52. Original loan amount was $86904 but by the time I am able to do all this extra payments, the loan balance will be around $80000. Now, the way I had proposed doing this would be adding $100 per month of the year -- $100 for Jan, $600 for Jun, $800 for August, $1200 for Dec. Then in Jan back to $100. This averages out to an additional $650 a month, which is where I got that number from.

But the more I think about it, I think I would be better off paying an extra $300-400 a month on top and then saving the rest and then if I get to the point I can pay off the entire mortgage I will wipe it out. That way I can not have to worry about being 'ahead' on the mortgage and then losing the job and ending up in foreclosure when I'm not far from paying it off.

All in all I am hoping to get the loan down far enough to get rid of the escrow accounts -- but there is no guarantee this will happen I may be stuck with it. There may be a point where I am able to get a second mortgage and then use the second mortgage to pay off the first, thus dropping the escrow and freeing up cash flow. There are a lot of scenarios.


I like that you showed the diminishing returns and I now realize I may be better off doing double mortgage payments and investing the rest. I have a lot of things to consider. Although it is a high priority to pay down the mortgage, it maybe shouldn't be handled the same way I'm handling the debt snowball.

[Greebo]

Thanks, you took the bait :-).

I knew I was being sucked in.

Now, the way I had proposed doing this would be adding $100 per month of the year -- $100 for Jan, $600 for Jun, $800 for August, $1200 for Dec. Then in Jan back to $100. This averages out to an additional $650 a month, which is where I got that number from.

OHHH I see. Nah - just average it. As you saw with the diminishing returns, the biggest bang comes from the earliest bucks.

I like that you showed the diminishing returns and I now realize I may be better off doing double mortgage payments and investing the rest. I have a lot of things to consider. Although it is a high priority to pay down the mortgage, it maybe shouldn't be handled the same way I'm handling the debt snowball.

The mortgage payoff is a high priority but it comes AFTER making sure retirement and kid's college is funded (if you're going to fund kid's college).

No point having a paid for home but no money.

[Darlene]

All that math hurts my head, just wanted to make sure any extra you do put on it is clearly towards principal.