Accelerating Mortgage Payment Schedule
I have a second mortgage with a interest rate of 7.5% fixed that I’ve been trying to pay off as soon as possible, so I’ve been sending in (online pay) payments outside of the usual month-to-month schedule which has been messing up their system. They’ve since upgraded their online payment system so that you can specify what portion of your payment should go to principal and what portion shall go to towards interest (or if you want to make your minimum payment). With my non-scheduled payments, it was showing that I was paid through Jan. 2006, which is bad because I wanted my payments to be applied straight to principal and not towards future interest.
Why is the distinction significant? It’s the difference of a few months but in the early stages of a mortgage, a ridiculously high percentage of your payment is going towards interest because of how the loan is structured. With my second mortgage, I want to pay it off as quickly as possible and I don’t want the benefits of writing off the taxes. Look at how the regular schedule works (for the next year):
| Payment Date | Monthly Payment (P&I only) |
Monthly Interest | Monthly Principal | Monthly Balance | Cumulative Interest Paid |
| Dec 2005 | $207.58 | $63.48 | $144.10 | $9,926.00 | $63.48 |
| Jan 2006 | $207.58 | $62.58 | $145.00 | $9,781.00 | $126.06 |
| Feb 2006 | $207.58 | $61.66 | $145.92 | $9,635.08 | $187.72 |
| Mar 2006 | $207.58 | $60.74 | $146.84 | $9,488.24 | $248.46 |
| Apr 2006 | $207.58 | $59.82 | $147.76 | $9,340.48 | $308.28 |
| May 2006 | $207.58 | $58.88 | $148.70 | $9,191.78 | $367.16 |
| Jun 2006 | $207.58 | $57.95 | $149.63 | $9,042.15 | $425.11 |
Now compare that with the schedule if I made a flat out $2,000 payment:
| Payment Date | Monthly Payment (P&I only) |
Monthly Interest | Monthly Principal | Monthly Balance | Cumulative Interest Paid |
| Dec 2005 | $207.58 | $50.88 | $156.70 | $7,913.40 | $50.88 |
| Jan 2006 | $207.58 | $49.89 | $157.69 | $7,755.71 | $100.77 |
| Feb 2006 | $207.58 | $48.89 | $158.69 | $7,597.02 | $149.66 |
| Mar 2006 | $207.58 | $47.89 | $159.69 | $7,437.33 | $197.55 |
| Apr 2006 | $207.58 | $46.89 | $160.69 | $7,276.64 | $244.44 |
| May 2006 | $207.58 | $45.87 | $161.71 | $7,114.93 | $290.31 |
| Jun 2006 | $207.58 | $44.85 | $162.73 | $6,952.20 | $335.16 |
With that one “little” bump in the schedule, $10/mo goes from interest to principal and across the life of the loan I’d save $770.59 in interest and make fourteen fewer payments.
I made a quick phone call into the mortgage company and they’ll fix the problem within a week. While I don’t know exactly how much money that phone call saved me (and realizing the problem), I know it definitely saved me three months on the schedule.
Print Article
Email Article
Stumble It!
Bookmark
reddit.com
Tags:
| Related Posts |
Did you like this article? If so, you can get all the latest articles delivered to your email inbox for free each morning by entering your email address in the box below. Your email will only be used to deliver this once-daily subscription and you can unsubscribe at any time.
There are 9 comments, add your thoughts now!
I apologize for the off-topic comment.
Please contact me as soon as possible. I cannot reach you via EMAIL. and all the submissions to the Carnival of Personal Finance are bouncing because the bargaineering.com POP server says there’s something wrong with our IP address.
This actually made me think of something that I have been wondering for a while that may be an interesting article for some others as well. I just bought a new house and have been paying an extra $200 a month towards my mortgage…what are the pros/cons of putting this all towards the principal or all towards the interest. What should I be putting it towards? I never even thought about the tax write-off and always assumed that it was better to put it towards the principal to shave some years off.
Just a thought.
-Rick
Why would you want to prepay interest?
There are some good reasons for paying down a mortgage early, but generally it doesn’t make economic sense. Even at 7 1/2%, your net cost of borrowing (after taxes) is probably below 5% depending upon your fed and state tax rates. Add to that the leveraging benefits of buying an appreciating asset with someone else’s money. But if it makes to sleep better, by all means…
Rick said:
> what are the pros/cons of putting this all towards the principal or all towards the interest.
The con is that you’d be throwing money away. The pro is that the bank would really like you.
Jim said:
> Why would you want to prepay interest?
You wouldn’t.
>> Why would you want to prepay interest?
>You wouldn’t.
OK, that is what I thought…but it kind of sounded like there might be some good tax reason to do it. I always wondered why I had to choose to tell my mortgage company that any extra money goes towards the principal…I figured that maybe some people put it towards the interest for some reason. Thanks.
-Rick
Rick,
You specify that it all goes towards the principal because the default is that the payment goes towards your next payment. So if you were to send them your payment on September 1st, it applies to your September 1st payment. If you send them a payment on September 15th, you have to specify that it’s all going to principal or some companies will just apply it as your Oct. 1st payment. That’s the difference…
Carnival of Debt Reduction #8
Welcome to the 8th edition of the Carnival of Debt Reduction, which is a weekly smorgasborg of the best debt reduction articles as submitted from bloggers. While I don’t talk about debt reduction very much, I would suggest that they key is first to fi…
[...] Accelerating Mortgage Payment Schedule - Jim of Bargaineering talks about how his mortgage company was misapplying his extra mortgage payments, putting them towards future monthly payments instead of against the principal. Sometimes no matter how hard you try, people manage to make reducing debt even harder. [...]
Previous Article: « New Home Hiccup - Water/Sewer Bill
Next Article: Carnival of Personal Finance Submission »