Author Topic: two mortgages extra principle payments - theory discussion  (Read 3642 times)

Luck better Skill

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two mortgages extra principle payments - theory discussion
« on: November 10, 2014, 09:29:37 AM »
  Trying to apply some Think Fast, Think Slow to this.  If you have two mortgages on two properties the fast thought on extra principle payments is pay off one first use the increased cash flow to pay the second one off.  But thinking slow by alternating paying them down you increase the amount of the base monthly payment that goes to principle.  Or perhaps pay one down to the point that 50% of the monthly goes to principle then focus on the second mortgage.

Variables - interest rates, ARMS, tax deductions, increased cash flow, PMI, other investment opertunities would all effect the best option.  I want to keep the problem simple with same interest rate and amounts.

Parameters:
2 mortgages, both $150K, at 5% interest, 30 year fixed.  Have $3,000 extra a month to apply to principle.  What is the best way to reduce the amount of interest payed?  Is that also the fastest way to pay both off?


Any good number crunchers out there?  Thoughts?

Cheddar Stacker

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Re: two mortgages extra principle payments - theory discussion
« Reply #1 on: November 10, 2014, 09:44:41 AM »
Given the parameters you laid out the payoff order is irrelevant.

Think of it in terms of investment asset allocation. You have a 401k, and IRA, and a taxable account. It's important to place certain assets in certain accounts, but you should consider your asset allocation as a whole.

The same would apply here. If the loans have the same terms paying one off faster than the other is irrelevant in terms of total interest paid and time to payoff completely.

If you have cash flow issues, paying one off completely is best. If one interest rate is higher, paying the higher interest rate off completely is best.

All that said, I would not buy two properties. If I'd purchased 2 properties and planned to keep them both, I also wouldn't pay off the debts faster than the amortization called for unless I had massive cash flow issues.

Luck better Skill

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Re: two mortgages extra principle payments - theory discussion
« Reply #2 on: November 10, 2014, 12:05:21 PM »
  Cheddar Stacker consider the 3k after other funds allocated to 401K, IRA, etc.  I was trying to figure out if there was a $ difference in the two methods.  I can run a mortgage calculator on the web but when you are making prepayments every month I run out of toes.

Add to the parameters both are mortgages on rental property.

Cheddar Stacker

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Re: two mortgages extra principle payments - theory discussion
« Reply #3 on: November 10, 2014, 12:13:20 PM »
2 rental properties, ok, that adds a wrinkle. Now I would do that, and I plan to. The tax deduction creates another reason not to pre-pay it. I would take advantage of all 401k''s and IRA's as you mentioned as well.

I don't think the 2 methods create a difference of even $0.01. 5% interest and 5% interest on both loans = 5% interest on total outstanding balance. Pay one early, pay both early, same result. Any pre-payment reduces your total outstanding principal and all future interest, but the loan you choose to pay down is irrelevant.


Catbert

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Re: two mortgages extra principle payments - theory discussion
« Reply #4 on: November 10, 2014, 01:01:36 PM »
I would pick one and focus on it - everything else being equal.  Yes, early on most of your payment is interest but that isn't because the interest is front loaded.  It's just a function of 5% on 100K is more than 5% on 50K.  I don't think there is anything to be gain with splitting the extra payments between two mortgages all thinks being equal.

I might pick the one with the lowest balance to increase cash flow when it's paid off.  Or the one I'm most likely to sell first if I'd like a lump sum payback later.  Or the one I'm least likely to sell if I think the interest rate is better than I would get in the future.

frugaliknowit

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Re: two mortgages extra principle payments - theory discussion
« Reply #5 on: November 10, 2014, 02:43:53 PM »
Have you considered refinancing out of the 5% mortgages?  You are paying more interest than you have to.

Cheddar Stacker

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Re: two mortgages extra principle payments - theory discussion
« Reply #6 on: November 10, 2014, 03:22:32 PM »
Have you considered refinancing out of the 5% mortgages?  You are paying more interest than you have to.

If they are actually on rental properties that could be the going rate. Commercial lending for non-owner occupied properties tends to be higher than owner occupied personal residences.

Also, this read more as a thought experiment than an actual situation OP is in, but maybe I'm wrong??

Dicey

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Re: two mortgages extra principle payments - theory discussion
« Reply #7 on: November 10, 2014, 03:28:39 PM »
Have you considered refinancing out of the 5% mortgages?  You are paying more interest than you have to.
Not so much for rental properties. The general rule of thumb is at least 1/2% reduction before re-fi makes sense. Hard to find sub-4.5% loans on rentals. Now, if anyone out there knows of any, please feel free to chime in with specifics. Otherwise 5% is okay.

Beyond that, what CheddarStacker says.

Bob W

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Re: two mortgages extra principle payments - theory discussion
« Reply #8 on: November 10, 2014, 03:36:56 PM »
What is your total ROI?    Perhaps the answer is raise the rent or sell the properties.   I see very little sense in prepaying a mortgage.     It makes Dave Ramsey Financial Peace sorta sense but not very good math sense. 

So for me,  if you're in a market where you can actually earn a real 12% return on real estate,  I would be saving the extra cash (3K in this case?) and using that for a down on another 150K property.  So that might take about 10 months.   The next property would take 9 months.  Then 8.  Then 7. Then so on.   

If you're in a market that real estate does not really earn money (which appears to be most markets) it may be best to remove that from your portfolio. 

feelingroovy

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Re: two mortgages extra principle payments - theory discussion
« Reply #9 on: November 10, 2014, 06:25:40 PM »
I ran the numbers through amortization software that allowed me to add prepayments at specific times.

In either case, the numbers come out the same.

If both mortgages began on Jan 1, 2015, both would be paid off in May 2021 for a total of $50,662.72 in interest.

In the "pay one off first" scenario, this did require snowballing the payment of $805.23 from loan #1 to loan #2 in addition to the $3000 prepayment.

Luck better Skill

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Re: two mortgages extra principle payments - theory discussion
« Reply #10 on: November 13, 2014, 09:15:12 AM »
I ran the numbers through amortization software that allowed me to add prepayments at specific times.

In either case, the numbers come out the same.

If both mortgages began on Jan 1, 2015, both would be paid off in May 2021 for a total of $50,662.72 in interest.

In the "pay one off first" scenario, this did require snowballing the payment of $805.23 from loan #1 to loan #2 in addition to the $3000 prepayment.

  I was seeing about a two hundred dollar difference in my calculations.  Not a enough to matter.  I was wondering if anyone was better at amortization math than me.

  The numbers I used were to keep it simple.  The interest rates are at 4.25 and 4.5.  I will pay off the higher before I consider another property as I want to improve my cash flow.  Exception for a bargain property.

  Thank you everyone for the input.