Homeowner's surprise
22I hope this might help some people here with mortgages - I know there are a few with recently purchased homes.
I have a 30-year loan which I refinanced in 2003 to lower interest. I immediately started paying a little extra every month. Each time I got a raise, some of it went to pay down the principal. I’m talking about $30 to $50 extra per month or so.
I didn’t think much about it for all these years, my statements didn’t seem to reflect a difference.
I recently had cause to call the mortgage company and asked about it out of curiosity. My statements still say the loan ends in 2033 because that is the contract, but it turns out I have cut off 8 years! My little house will be paid off in 2024 if all stays the same.
Maybe then I can start paying for some repairs. 
Caveat - I didn’t pay much for my house by today’s standards, but anything you can do to pay some principal near the beginning will help.
- 16 comments, 37 replies
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Nice!
/giphy Good Job!
@sammydog01 - Thanks.
That looks like giant cow.
@sammydog01 what is that, that comes out of the cow on the left’s mouth, before the cow on the right talks?
@moonhat
¯\_(ツ)_/¯
@moonhat @sammydog01 I think it’s straw.
It’s edited oddly.
That’s wonderful!
Caveat: anyone practicing this should contact the loan processor, or otherwise be certain, that an excess payment over the minimum will be applied to principle, not to the next payment. (Different processors set different defaults.)
@f00l good point. I have to put mine in a certain spot on the payment slip (or blank in the form online) to indicate that the extra payment is to go toward the principal.
@djslack @f00l - I never specified anything, just paid extra. Guess I’m lucky it worked out this way.
Thanks for clarifying.
@f00l Same thing with school loans as some companies don’t do that unless you ask.
@f00l @Kidsandliz it was supposed to change based on Obama-era legislation. I don’t know if it’s a thing still. But in general, anytime you pay extra money, for anything, make sure you specifically say how to use it!
So, wait… You’re telling me if I pay more to my mortgage, it’ll be paid off sooner?!
/giphy mind blower
@medz - Yeah, okay. I am far from a financial whiz. I figured others like me could benefit from the info.
@medz It’s not just that you pay off the loan sooner by making more payments toward it. You significantly lower your total interest charges by lowering the principal faster.
If you look at comparative amortization calculators with and without the extra payments (toward principal), you’ll find that the total amount you will have paid (principal + interest) by the time you make your final payment will be far lower by adding more to each principal payment.
@shahnm Wait…so you’re telling me if I make extra payments towards the principal loan amount, this will decrease the amount of interest that is added onto the total loan repayment amount thus it will be paid off sooner?!
/giphy mind f
@medz I realize you’re trying to be snarky, and I’m all for that… But for those who might benefit from this info, I’ll say it this way:
If you take whatever extra payment you can manage each month and put it toward the principal from the beginning, vs. putting that money in a separate account with the intention of saving up and paying off a large lump-sum near the end of the loan, you’ll save a lot of money and pay off the loan sooner through the first option.
@shahnm Yeah, but it would likely behoove those folks to pay more towards debts with higher interest rates first. But, you’re right. If someone is just putting money into a savings account (with low interest earned) it would probably be better to put that to the mortgage principal unless they need to build an emergency fund. I’m not a professional financial adviser, though.
This post is Dave Ramsey approved.
Cool. We were able to cut over a decade off our mortgage by paying extra towards the principal from the first payment, even when we really couldn’t afford it…
Paying extra during the beginning helps most, that’s when payments are almost all interest.
I’d never get a mortgage that wouldn’t allow payments towards the principal and no penalties for early pay-off.
@daveinwarsh I didn’t know those type of loans were allowed anymore… (where you’re penalized for paying off early)
@medz I wouldn’t know either. The last mortgage I got was probably 25 yrs ago…
Rule of 78 loans (home loans) are hard to pay down quick, unless you start that overpayment right at the start. There is a certain amount of interest essentially baked into the loan, in that you pay it first. Every payment has a certain amount of interest assigned to it. By paying principal down, you essentially eliminate the end payments, and thus save the interest. The general math (far from absolute) is making an amount equal to a normal payment directly to principal each year will reduce your loan from 5-10 years on a standard 30 year loan (amount, interest, and other factors will make this vary). You can do this all at once, or, as most do, slice it into 12 payments and add that to your bill.
For simple interest loans (car loans) you accrue interest starting the day after you make your payment. When the payment arrives, the interest is paid off first, then the remainder goes to principal. Simple interest loans also get exponentially easier to pay off the more you pay over the normal payment, regardless of when you do so. There’s less impact near the end, of course, but even adding a small amount will reduce the principal, which reduces the interest that accrues, which then allows more of your payment to go to principal as there is less interest, and the circle repeats.
As you can see, R78 loans are more profitable for banks, which is why your home loans are that way - they’re gonna make at least 1x your home value in interest, even if you pay early and extra every time.
@Ozzie2191 - Thank you! I am happy for the explanation. I understood the principal principle on some level, but this makes it clear.
We paid off our 25 year mortgage in 9 years by using our amortization schedule. Each month we enclosed the regular month’s mortgage and a second check with a letter stating how much was still owed according to the schedule. When we got within a few months left on the schedule, we called the bank to ask how to go about a final payment. Unfortunately, the bank had changed hands 3 times in those 9 years, and had no record of any of our prepayments. They had cashed all of our checks. We had kept records of all letters and canceled checks sent. The bank mortgage department manager with whom I spoke said she would unravel the mess (with the help of our records) and she did. Needless to say, the difference between what the bank had thought we owed and what we actually owed was many thousands of dollars. I would suggest you keep records of all of your transactions with your lender. Call and ask for a written summary of your current mortgage status and record of prepayments. If possible, use an amortization schedule when making prepayments, as it will allow you to know exactly what you owe. Interest payments vs principle change every month. The first years of mortgage payments are mostly interest but towards the end they are primarily principle. When prepaying, you pay down the principle. This schedule will help you understand exactly where you are on that spectrum. Congratulations and best of luck.
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@sophi - Wow, congratulations to you!
Scary prospect about losing your records. My bank kind of folded and another bank took over, but the new bank is the one that told me of the loan status. Good advice on asking for records, thank you.
Bet you’re the kind of person that gets your taxes just right, without underpayments or refunds to bother with.
It always helps to know where you stand, I definitely don’t pay enough attention.
@kdemo Well… It was sophi’s choice.
@Barney -
Yay!
I’ve been doing the same too, and am on track to pay off my mortgage in 21 years.
(Hopefully sooner, though.)
@narfcake - Feels good, right? Congratulations!
@kdemo Yep, and thanks! Can’t escape the taxes, repairs, and other maintenance, though.
@narfcake - Tell me about it. I just this week had to pay $3k to fix a leak that no one could find. Figured it must be under the tree, so had to run new water lines from the street to the house.
Don’t feel sorry for me, just feel sorry for my credit card.
My wife & I refinanced our mortgage in 2011. The monthly payment became about 1/3rd the original mortgage. We always pay extra into it.
We are on track to pay it off within 7 years.
Yup… you save a LOT of money if you pay extra. It goes directly to principal and that loan is paid off much more quickly.
I haven’t had a mortgage for a little over 20 years now. It is indeed a nice feeling.
@macromeh Ditto. But, I just bought a new house. Paid mostly cash but financed a small part but will be paying that off next summer so… no pain.
1 year to go by doing what @kdemo did!!! Not looking forward to being responsible to pay the taxes twice a year though… this being responsible crap is wayyy overrated!
@mikibell - Oh, yeah. I forgot the taxes and home insurance are tied up in the mortgage.
After buying my house, I found a chart that showed how much interest I would pay if the loan went the full 30 years. What the hell!!!
I was in sales, so used my big Christmas checks towards the principal, besides throwing more at it every month. Saved a lot of $ and it was a good feeling when I got the “Paid in Full” notice!
https://www.calculator.net/mortgage-payoff-calculator.html
And as f00l said, make sure your extra payments go to paying principal down.
@transplant Oh heck yeah. We bought a house back in '81 and the interest rates were sky high at the time. We figured out that we would have paid $142,000.00 for a $37,000 house if we just went with the 30 yr loan and not paying it off early. That was quite sobering.
You save more money if you don’t have a mortgage.
/giphy living in a tent
@Barney Nope
@lseeber Nope? Looks cozy to me.
@Barney @lseeber It’s 19F where I am right now. Not cozy enough.
@lseeber @transplant But are you saving money on a mortgage?
@Barney Foul: that does not appear to be a purple tent. You will be charged a late fee.
@shahnm Haha, it’s just the lighting.
@Barney @transplant Here’s a seasonal alternative:
@sammydog01 Does it have a basement?
@Barney Yep- it has a dirt floor though.
@sammydog01 I’ll take it. Spray paint it purple and deliver it my house. The back gate is unlocked.
@Barney Looks cozy for a brief camping vaca but not everyday. Been there, done that.
@Barney @sammydog01 - Don’t know about tents, but I’m not opposed to hooking up with a shed guy.