Author Topic: Extra mortgage payment per year - does it payoff loan faster?  (Read 780 times)

QueenV

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Extra mortgage payment per year - does it payoff loan faster?
« on: November 16, 2017, 09:02:15 AM »
At some point in the past, I'm sure I read that one way to pay off a mortgage faster was to make your payment every 4 weeks instead of once a month (13 payments per year instead of 12).  We've been doing that for the last 6 years, so we are 6 months ahead on our mortgage payment.  We like this because we feel it gives us a nice cushion for an emergency as we could stop making payments for several months if needed. 

Our bank just sent us a letter saying that they will no longer allow us to do this.  It also says that paying ahead does not pay off the loan any sooner. 

Does anyone know if that is correct?  Maybe I'm thinking about the math incorrectly, but if we are making an extra payment every year, won't those add up over time and in fact, pay off the loan early?  It's a 30 year fixed mortgage, if that is relevant.

I'm seriously considering moving our loan to another bank because of this.  We could probably get a lower interest rate if we move as well (currently we're at 4.5%, it looks like we could get 4% elsewhere).  Additionally, the mortgage is through a different bank than the one we use for our day to day checking/savings, so I wouldn't mind having everything at one location.  Our regular bank is advertising 4% rates on 30 year fixed mortgages.  Moving it hasn't felt worth the effort in the past, but this might be the catalyst that makes it worth it.

atxian

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #1 on: November 16, 2017, 09:09:48 AM »
It’s my understanding that paying down the principal doesn’t let you stop making your monthly payment for a certain period of time. You still have to pay your normal payment each month until the entire loan is paid off


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YoungGranny

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #2 on: November 16, 2017, 09:24:54 AM »
It sounds like they were counting these as extra payments instead of extra principal . So you are correct in saying you could stop paying for X-months because you've been pre-paying. The better approach to this would be to make an extra principal -only payment each year. Some companies let you do this online and some make you call in but you have to specify that the entire amount will go towards the principal . This WILL payoff your mortgage faster instead of just making future payments (these include interest as well). Hope that helps!

topshot

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #3 on: November 16, 2017, 09:36:09 AM »
I just added on an extra amount to each normal monthly payment. If they won't allow you to make extra principal payments then it's time for a new bank.

QueenV

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #4 on: November 16, 2017, 10:09:45 AM »
They will allow us to make extra principal payments, so yes, that is an option and it's what they are recommending.  Currently our next mortgage payment isn't due until May of 2018.  That is the benefit of making an extra full payment each year.  I swear, I read about this tactic in a personal finance book at some point although it's been so long now that I can't remember which one.  Maybe David Bach?  Anyway, yes I understand that making extra payments toward the principal pays it off faster but I thought extra full payments each year also accomplished this and had the added benefit of giving a payment cushion.  Has anyone else heard of this or is my mind playing tricks on me?

Starting in December, there will be a three month limit of how far ahead you can be paid.  So we can ask them to apply the extra payments we've made to the principal now or any future payments we make will be applied to the principal until we are down to the three months paid ahead limit.

Whether or not to pay off a mortgage early is a hot topic on this forum, so I'm not sure whether I actually want to make extra principal payments right now or not.  Might be better to put the extra towards retirement...

waltworks

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #5 on: November 16, 2017, 08:20:02 PM »
I would assume that if you're paying monthly payments early, the bank is just taking your money and sitting on it - applying it to the principal balance (and accrued interest) only when the next monthly payment comes due.

In effect, you are giving the bank an interest free loan in exchange for a "cushion" - which you could have (plus interest) by simply putting the money in a CD or even a savings account instead.

Paying extra principal will indeed pay off your loan faster - regardless of whether you do it in big chunks, little chunks, every 2 weeks, once a month, whatever.

What you are doing is probably dumb, though. If you want an emergency fund (or a bigger one) put the extra money there. Don't just give it to the bank for nothing!

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cchrissyy

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #6 on: November 16, 2017, 10:42:57 PM »
when you send in extra payment, one of two things can happen
1 - they apply it for next month's payment
2 - they apply it to principal


it sounds like you and your bank were doing option 1

the way to pay off your loan faster is option 2


don't change banks. this new policy is doing you a huge favor! (yes your memory was playing tricks on you if you thought extra payments could do both jobs at the same time)

your best move right now is if they would apply your previous extra payments to principal, and in the future any time you want to send in more money you mark it as going to principal.

maybe you'd like to play with an online calculator to see how many years the extra payments are worth.
https://www.mtgprofessor.com/calculators/Calculator2a.html
« Last Edit: November 16, 2017, 10:46:33 PM by cchrissyy »

Enigma

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #7 on: November 17, 2017, 01:18:29 AM »
I have never heard the 4 week idea.  However, I can see where it would be confusing for the loan company.  Easily works out on paper (52/4=13) but not as easy when you have a payment due on the 1st every month and you make a payment a couple of weeks before the due date and a couple of weeks after the due date.  Liable to get charged a late fee or hurting your credit.  Even the company is likely to be confused and think they credited you for an extra payment by accident.

I would recommend a monthly pmt due on the due date + 1/12 pmt extra towards principal.
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Freedomin5

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #8 on: November 17, 2017, 06:39:28 AM »
I think it depends on the bank and the individual terms of your mortgage. For example, my (Canadian) mortgage allows me to do pretty much exactly what you described. I pay every two weeks, instead of monthly, resulting in the equivalent of 13 monthly payments.

This allows me to pay off the mortgage more quickly. However, it also gives me the flexibility of taking a "payment vacation" if necessary. Actually, I think they would prefer that I take payment vacations, since interest continues to accrue on the outstanding balance. It's not really in the bank's interest for me to pay off my mortgage as quickly as possible.

harvestbook

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #9 on: November 18, 2017, 09:54:04 AM »
But it is in the bank's best interest for you to pay them interest money early, as advance payments do if not earmarked for principal. In fact, it's like you're paying double interest (interest on the loan and the loss of interest on the money you'd have had).

Dicey

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Re: Extra mortgage payment per year - does it payoff loan faster?
« Reply #10 on: November 26, 2017, 07:34:11 AM »
1. If you're going to stay in this house for the foreseeable future, re-fi it right now.

2. Doing so will lower your payment. Invest the difference like clockwork.

3. Stuff any extra money you have into investments. The earlier you do,  the more those dollars will pay you back.

4. The older your mortgage becomes, the less those dollars cost you because of the cumulative effects of inflation.

5. Over time, investing correctly always returns more than prepaying a low interest, fixed rate mortgage.

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