You aren’t saving a single cent of interest with your current method. You are simply sending in future payments early. If that is your goal, that’s great. If your goal is to reduce interest paid, then you need to send extra principal with your regular payment.

Mortgages are not simple interest notes. With a simple interest note, interest accrues daily. If mortgages were simple interest, the amount of interest would vary due to how many days in the month and whether your payment had posted on the 30th, the 1st, the 4th, etc. However, as you can verify with your amortization schedule, your monthly interest does not vary at all based on days of the month or the exact date your payment posts.

If I were you, I would contact my lender and see if they won’t re-apply the additional payments you have already made. Payments received mid-month could have been held in suspense and applied as additional principal on the first of the following month. (Assuming that your goal actually was to reduce interest paid.) If they agree, then you will no longer be paid through May 2010, but you will have reduced your principal balance and the life of your mortgage.

Regards,

Petunia

When is the best time of the month to make an extra payment? Assuming you make your regular payment on the 1st of every month, and you want to put extra money toward the principal, should you do that in the middle of the month, or just shortly before you make your regular mortage payment? I read once that the less time that has passed since the last time your account was active, the more money will go toward your principal and the less to interest.

With my well-funded emergency fund in place, I am diverting extra funds to paying down my mortgage debt in 4 years. After those 4 years (1.5 to go), my same emergency fund will be sufficient for covering three times the amount of unemployment than it does now.

By paying down my mortgage debt every month, I end up paying much less interest (debt) to the bank than if I paid it off in a lump sump even 1.5 years from now and certainly much less than when I began paying off that debt in earnest 2.5 years ago. It’s actually astounding to realize how much interest (debt) I avoid paying the bank by paying extra each month versus paying in a lump sum at the end. That amount far outweighs any amount over the standard tax deduction.

With a well-funded emergency fund, why pay down credit card debt? Why pay down car loan debt? Why pay down personal debt? Why pay down house debt? Because when debt is $0, then my emergency fund is worth more months of coverage and my obligations are easier to meet.

I know you are urging people to see Tax and Financial Advisors. My sister is one of those and she has paid off her house. In addition, people need to beware of financial advisors who, instead of charging a flat fee, give “free” advice and make money off of the investments instruments they steer customers to.

Perk – the point is to have access and control of your (home equity) money, not to get rich by investing it. And to be in a position to be able to pay off your mortgage IF you choose to when YOUR assets equal or surpass your debt. I strongly urge homeowners to involve their Tax and Financial Advisors when structuring such a strategy. I would feel much better 15 years from now knowing that I can pay my mortgage off if I want to, than knowing I have my mortgage paid off and not much in liquid assets. Also, you will be suprised at how many people give extra money to their lender every month with the goal of being mortgage-free by the time they retire only to learn that the tax on their 401k income will have to be offset to maintain their pre-retirement lifestyle, so they end up taking another mortgage (if they qualify) to get their money back out of the house.

Going forward, anyone with a mortgage, or planning on having one, needs a viable plan to pay it off early. Not only will this build equity, but it will also open up more options in the future. How important is that??? – KEVIN”"”"”

The future does not always supercede the NOW. Not paying down the mortgage is NOT why people are in trouble. Not having adequate liquid savings is why people in trouble. My current mortgage is $600/month. I could pay $1000/month, every month. Then, I get fired. I have less savings than I would have if I just pocketed the extra $400 a month, and do you think that because I’ve been “paying down my mortgage” that my payments will decrease, or that they will forgive me if I’m late a month or two? Paying down the mortgage does NOTHING to secure the present (and what good is the future of your asset if you lose that asset). Like I said, I could be $400 over my mortgage until the last payment, and that last payment will STILL be the original amount of $600. Paying down the mortgage does NOTHING for my current financial situation (and less for my future financial situation) than merely saving the money and paying it off at once.

Also make sure to take account of capital gains taxes on investing money and then using it to pay off a house in a lump sum. No one seems to argue against investing and making money because one pays capital gains tax on those earnings. Yet people turn around and argue to not pay interest on a loan off early because of a tax deduction. The tax deduction argument is to pay out $1 to save $0.25 (or $0.33).

Appropriate tax refund every year towards an extra mortgage payment.
eg. 150,000 over 30yrs @ 5.5 with 20% down

say an additional 1200 in from yearly tax refund will shave atleat 10 yrs.

how about that.

But I think you are talking about two different issues. ONE of them is about having the liquidity to survive for several months if you lose your job. This is what the Ramseyites call the Fully Funded Emergency Fund. Don should absolutely save enough cash on hand to handle that contingency. I and I don’t think most people who advocate paying off your house early would argue against that point.

But MY house hasn’t really gone down in value, in fact I’m pretty sure I could sell it for more. I can qualify for a HEL or HELOC if I need it. I can lose my job and my wife can still make the mortgage. In a few years, MY house will hopefully be paid off early, and I will no longer be mailing a substantial portion of my income off to never be seen again. I will at that point have a whole lot less to worry about, certainly less than the client of your associate. But I will concede that it is an issue that is individualized and there is no stock answer to IF you should pay your mortgage early.

I don’t think the rules have changed. If you buy what you can afford, prepare for emergencies, save money, don’t spend more than you make, then you will still be OK. Just like granddaddy use to say.

Are you specifying that the extra funds are for principal reduction? If not, you should start.

Call Citi Financial and tell them you intended those extra monies to be applied to your principal balance and ask nicely to have this corrected. Don’t take “no” for an answer.

You probably need to discuss this with an attorney, accountant or other trusted financial advisor, preferrably one who knows you and your situation fairly well, and doesn’t stand to benefit from your decision.

Age, employment and income, assets, assets after loan payoff, future intentions, family situation, future cash needs, non-mortgage debt and other questions all need to be addressed before anyone can give a yea or nay opinion on the payoff, and you certainly don’t want to be sharing any of that on the web. Good luck!

Going forward, anyone with a mortgage, or planning on having one, needs a viable plan to pay it off early. Not only will this build equity, but it will also open up more options in the future. How important is that???

I think we are more in agreement than not.

Basically, have enough cash or equivalents (fuel, ammo, alcohol could end up as cash equivalents if things get bad enough – forget gold and other metals) to cover your emergency situations.

Beyond that (what, $50k max), I think dividing extra savings up between looking for great deals due to deflation and getting a guaranteed 6% or so return by paying off a mortgage early is a great way to go.

In comment 35, Eden wrote:

“Yes, having access to the cash would be nice, but it doesn’t seem worth it.”

My response was to show why it is worth it.

As to your second point, I totally agree. This is the era of instant gratification but living as if the the money rules and practices are the same as those of our parents and grandparents. The rules have dramatically changed and not too many bothered to pay attention.
If people do not start planning properly, what we just went through will be nothing compared to what lies ahead. I don’t like to be negative, but reality is going to kick many people quite hard when it’s too late for them to do anything about it. and the results will be people being under-insured, unable to afford health care, no or insufficient retirement funds, and outliving their retirement funds. It’ going to be a real Bang for the Boomers. I hope they at least take better care of their health because I think they’ll have to work for many more years than their parents/ grandparents.

I don’t think anyone is arguing for not having an emergency fund.

And I agree that the vast majority of those who lost their homes are not victims of the “mortgage crisis”. In fact, I believe that the vast majority are victims of their own poor planning.

While I agree that a big emergency fund is important to have before making significant extra payments, saving those payments over the intended payoff period is very expensive.

E.g. a $350,000 balance at 6%, $800 extra per month, 1% earned in a savings account. Back of the envelope, this would cost me nearly $100,000 in extra interest if I were to bank the $800 for ten years and pay off a lump sum. Yes, having access to the cash would be nice, but it doesn’t seem worth it.

Yes, these numbers are imprecise and you could find other numbers that make more of a case for saving the money, but you would still miss out on significant interest savings.

One thing I found was that even small payments help. If all I could afford to overpay was $10 a month, that would have still been enough to pay my mortgage off a full month early. So every 10 bucks you can scrape up helps. Every $100 you can scrape up helps more.

Eden #29- That is what I do, too. I have a budgeted amount which I pay, and raise it a bit each time I have a raise or eliminate a monthly expenditure.

I’m not asking about the biweekly plan. I’m asking about paying semi-monthly, 24 (not 26) half-payments/year.

Details in my original post, #25.

Can anyone answer?

When I first started I was using the haphazard method. When I refinanced to a lower fixed 30year mortgage I just kept making the same payment that I had been paying. Now that all my other debts are paid I pay at least $1k to the principle each month. My target date for having the house paid off is May 2012.

Our mortgage servicer offers the biweekly payment system if you set them up to draw directly from your bank account, and they charge a fee for that, which made me leery of it. I’m not sure what the bank would do if you just sent in the biweekly payments yourself – probably someone here does that and knows how it works.

In the past our current mortgage servicer has done stuff like double-billed us for the same month because we paid before some arbitrary date in the month, and randomly decided that for overpayment we should be assessed a late fee, so I don’t do auto-deduct.

You’re still paying $12,000 per year, but the bank sees half of that amount 15 days early, month after month.

Does this work? It looks like it would shorten the loan considerably and reduce total interest. Or is the logic incorrect?

I wish mortgages were this same way as well — then there would be less “risk” in paying off a mortgage early. If you lose your job, your money is not “locked-up” in the house: you will have a few months (or years) of $0 non-payments to make until you ‘catch-up’ and then the normal payment schedule resumes.

This would eliminate a large barrier (at least for me) for paying off a mortgage early.

Unless mortgages change, it is strongly advised that you have 6-12 months in liquidity (cash or similar emergency fund) _before_ paying extra on a mortgage — depending on whether you have a two-earner (6 months) or single-earner (12 months) household. This also means that people who are buying a new home for the first time: you should also have 6-12 months in CASH on top of the down-payment you are making for the new home purchase.

I was hoping to do this to lower my payment, and then keep paying the same thing. I also overpay a fixed amount (around 15%) on the same check, and it is always applied to principal.

I have always rounded payments up to the nearest $50 or $100– speeds payoff at a comfortable rate.