Best VALUE on early pay of loan

forumsviewer · Joined: 01 Aug 2008 Posts: 5

I would like to make the best value on the money loaned to me for a mortgage. It is a standard loan of which I will post the details below. Basically I want to pay early every month and ultimately pay the least amount of interest as possible while still maintaining the purpose of the loan.

For example, I heard that the majority of interest is accumulated up front in the first 10 years or so of a 30 year loan. So my thought process a lot more than the payment amount each month for the first two years or so that way the pricipal is smaller ad the next 28 years I don't accumulate near as much interest.

I assume that there are some calculators online. I have actually found a few, but wanted some "true experience" help, not what a computer tells me.

Also, when you pay more than your payment, is it better to pay your exact payment amount, and then the next day pay the "early pay" that goes toward principal, or is it better to just pay single lump sums each month?

Details:
Rate: 6%
Term: 30yr
Amount: $200k
payment with taxes ~$1400

Looking to pay the least amount of interest so looking to pay much more than $1400 per month for the first few years (given that is how it works).

Opinions, comments and questions are welcome.

m2c · Joined: 03 Aug 2005 Posts: 764

No real “secret” to this. For some reason folks understand if they put more per month into a savings account, they’ll have more in the bank 10 , 20 or whatever years from now but they don’t understand the reverse.

Yes, there are calculators on line but I suggest you do a simple Excel worksheet so you understand what’s going on. Interest is calculated on the previous month balance – in your case .06/12 * prior balance. The difference between that month’s interest amount and the P&I ($1,200.24 in your case although there could be a penny difference for rounding) is what is applied to principal. Allow another column for any additional principal paid and subtract the amounts for principal to arrive at the mortgage balance to start the whole process over again.

Interest is normally calculated on a full-month basis no matter when received. You should have no problem sending the regular payment along with the extra principal in one check. Usually there’s a place on your payment coupon to indicate that you want the extra principal to reduce the loan amount.

One caution – there is a shell game that is reemerging. Basically it’s a sales pitch to take out (and get a commission) a HELOC to effectively use as your checking account, get another bigger commission on “this astounding computer program so you can do what sophisticates “in those smarter foreign countries” have known and been doing.

Do what you outlined in your post and you’ll pay less interest and shorten the term of your loan. Just remember that once you’ve paid the money to the loan, you cannot “take it back” or reduce future required payment amounts. All the above holds if you have a fixed rate mortgage. If adjustable rate, you’ll still save money as long as you keep the extra payments the same but the final payment is held the same for the calculation of P&I after each rate change.

forumsviewer · Joined: 01 Aug 2008 Posts: 5

Thank you so much for the prompt and informative reply.

So, is it not true that you are better off paying more (get principal down) at the beginning so that the amount that interest is calculated on (principal) is less?

Are there really big enough tax incentives to NOT pay more down than needed?

To me, it is like getting 6% on my money.

m2c · Joined: 03 Aug 2005 Posts: 764

Since interest for the following month is figured on the outstanding balance, a large principal payment in, say, month 1 has more effect than the same amount spread over the next, say, 12 months.

I guess I’m a traitor to my industry but I’m not big on emphasizing the “huge tax benefits of real estate”. I’ll leave that to the Realtors; I’m a get-out-of-debt guy. Play around with Turbo Tax or whatever to see the real net effect. With the loan balance you’re talking about, there’s minimal effect of the standard deduction cutoff.

Yes, it’s like earning 6% on your money BUT it’s not available to take back if needed. Keep potential liquidity needs in mind when you make decisions on principal applications.

Again, do the Excel worksheet. A packaged calculator on the Internet will give you the results but if you do it yourself, you will understand what’s happening.