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overpaying the mortgage

Posted by nycefarm (My Page) on
Tue, Jul 20, 04 at 16:42

Now that we have settled in, got that lower rate at 6.125%, I am wondering if I would be doing myself a favor by adding an extra $100/month to my payment. I have read in a couple places how beneficial it is, but want to hear it from our financial gurus here.
It shouldn't create a hardship, cause I would probably waste it on something else... And yes, I already do contribute to two retirement funds plus a roth IRA (though I could up my contribution from 2K to 3K) and teachers pension plan.
Also, I don't have the ammortization schedule as this is a new refi, is that an important document to keep?
Please advise!
Thanks,
Val


Follow-Up Postings:

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RE: overpaying the mortgage

During the early years of a mortgage, most of the monthly payment goes to pay interest and only a small portion to repay principal.

If you were to check out amortization tables which separate out monthly payments showing the amounts that go to each of interest and principal, I think that you'd be shocked at how little of those monthly payments go to repaying the principal.

Which means that, should you choose to increase your monthly payment by even a small amount, you would likely be reducing your principal still owing much more rapidly - possibly even twice as fast.

That would mean that your mortgage would be paid in full much more quickly, since more of your regular monthly payments would go toward paying down the principal. And - on an increasing basis.

One proviso - check the interest rate that you may be paying on (so-called) "credit" card (but really "debt" card) balances. Quite likely it's quite high, so you'd likely be better off paying off those credit card debts first.

There's something to be said for starting sooner rather than later on the paying extra on the mortgage plan - to get that habit embedded now, soon after you've made the recent substantial change in your financial system.

Good wishes for learning how to use money wisely - it makes a fine servant (but a terrible master). If you don't boss your money - there's a good possibility that it'll boss you.

ole joyful


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RE: overpaying the mortgage

Make sure that the extra money gets applied to principal. Check with your institution to ensure you do it correctly. Do not sign up for their 'automatic' deduction that they charge you for. That is a rip-off, when you can simply send the extra yourself.

We figure our 30 year loan is really a 20 year loan due to our extra $ applied to principal that we send in each month.


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RE: overpaying the mortgage

Thanks Ed. I've seen an ammortization schedule, though not for this loan. It is just sickening. I do have some credit debt from purchases we made, but they are all 0-2.9%. I paid for the appliances and utility installation instead of financing them for 30 years. I don't normally carry a balance, though I do most of our household groceries & gas purchases with a rebated card...
TREkaren - How much extra a month do you send? I mean relative percentage. This is such a small amount. I was pleased to see my first statement that showed the credited principal. A good statement - with everything clearly broken down how $$ are applied, even a line for the extra principal.
Thanks so much for your replies.
Val


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RE: overpaying the mortgage

There are online mortgage calculators that could tell you how much your mortgage term will be shortened by paying $100/month extra.


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RE: overpaying the mortgage

Percentage-wise, I guess ours is about 14% extra over and above our total payment.

Clark howard recommends a formula of taking your monthly payment, divide by 12 and send that amount in extra per month, effectively resulting in 1 extra complete payment per year.

We can afford to do slightly more so as long as we can, we're doing this amount.


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RE: overpaying the mortgage

I would just pay whatever extra that you can comfortably afford, which may change from month to month. If you make too much of a religion out of it, you may run yourself short of cash and then have to lean harder on your credit cards to get through the month. That's not any good.

On most loans where you're sent a monthly statement, all you need to do to ensure that your money goes to principal is to fill out the payment coupon and designate it that way. If you just add an extra sum of money to your payment and don't tell them what to do with it, most mortgage companies will put it into your escrow account, where it won't do you any good as far as reducing your principal balance.

After you make the first extra payment, I'd suggest calling the mortgage company's customer service number and making sure it was properly applied.


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RE: overpaying the mortgage

also check to be sure--must you mark the check in some way to be sure the excess goes to the principal?

My credit union would simply apply it to the next payment unless I wrote "excess to principle" on the check.

i think it's not a bad idea.


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RE: overpaying the mortgage

I wonder about them applying it to the next payment. If they did that, wouldn't they in effect be applying it to principal?

Regardless, it's just a matter of checking with the mortgage company to see how they want this done. I mentioned the payment coupon above; I think everyone has one of those whether they have a payment book or monthly statements. On every one I've ever had, you have a place to fill in the amount of your check and how you want it applied.

If it's electronically taken out of your checking account, you'd need to set up the extra principal payment as part of the automatically deducted payment, and as a practical matter you'd probably want to just keep it the same from month to month.


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RE: overpaying the mortgage

I have heard Clark Howard and have seen a Money Guru on Oprah and both say by making your mortgage payment bi-weekly instead of monthly you can save $1000's of dollars. I can't remember what makes this work but you could check out Clark's website.


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RE: overpaying the mortgage

My coupon has a line for "additional principal" where I can add any amount. And as I said before the last statement reflected the additional principal I payed last month. I wish I could afford to make two payments in a month, but for now I'll stick with trying to pay down principal a little at a time...
Thanks,
Val


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RE: overpaying the mortgage

Nonnie, it works because there are 52 weeks in a year. This means you make 26 bi-weekly or the equivalent of 13 payments, not 12. Prepaying saves you interest big-time over the years.


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RE: overpaying the mortgage

We refinanced recently, too. Went to a 15 year term and are paying an extra $400 a month in principal. Our income is temporarily high right now and I figured it would make sense to pay down principal as quickly as possible in the early years of the loan. At least that's what I've heard. Some people say it would be smarter to take that $400 and invest it in stocks or index funds.


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RE: overpaying the mortgage

I paid every extra dollar we had on the 30 year mortgage and had it paid off in 15 years. We pay off our cars the same way.


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RE: overpaying the mortgage

I buy cars for cash.

Bought 1980 Ford van (to deliver corn-fired stoves that I sold then) that had well over 200,000 km. (125,000 mi.) from a friend in 1990 for $1,200. Some repairs in the meantime, but it's gone over 300,000 km. by now.

Bought 1990 Dodge Colt, 1.5 litre engine, standard transmission, 138,000 km. (about 87,000 mi.) in 1997 from a friend for $2,700. cash and it has gone about 305,000 km. (about 190,000 mi.) now. Some repiars in the meantime, with one costing over $1,000. recently, but not unreasonable, I'd say.

This has allowed me to have funds on hand in order to pay cash for another vehicle when current ones give up the ghost.

I may not always have cash on hand - but stocks, mutual funds, etc. allow me to carry a fully secured line of credit at the bank (currently unused) that would charge me about 4.25% interest (last time I asked) were I to choose to use it.

They like that kind of collateral better than a vehicle, for there's very low chance of it evaporating (as would happen if I wrecked a car used as collateral) and it's much easier to turn into cash if I default on the loan.

Remember - every adult of you has your own business. Kids, too, really.

Your employees are dollar bills.

It's your job to make them work productively for you.

Good wishes for being a smart boss of your dollars.

joyful guy


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RE: overpaying the mortgage

We always rounded our mortgage payment up to the next even hundred. When it was paid, the check had "balance to principal" written on the memo line. I requested two receipts, but I tend to be pretty "conservative", at least when money is at issue. Additionally, we made a 13th. payment equal to our rounded up mortgage amount every year. We paid our mortgage off in just less than half the allotted time. Once you understand compounding, and begin to work it to your advantage you'll be nicely on the road to riches.

Our "plan of attack" was absolutely painless; we simply adjusted our expenses to our mortgage! There is more than a grain of truth to the old adage that when you "watch the pennies the dollars watch themselves", OR, "send your nickels out to play and they'll bring their little friends home..."

:) "Money makes a terrible master, but a wonderful slave".


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RE: overpaying the mortgage

I have been thinking that I would have to work as long as I have a mortgage. Nice to realize that it may be sooner than THIRTY years.
So I confess to having little mathmatical ability and I am wondering, in the most simplistic terms, how soon if:
$100/month to $1500 mortgage for 250,000 loan at 6% for 30 years?
I surely appreciate all replies, past and present.
Thanks,
Val


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RE: overpaying the mortgage

Assuming you owe the full $250k, an additional $100 a month would knock 4 1/2 year (54 payments) off your mortgage, and save you about $51,571.63 in interest.

On the other hand, if you invested that $100 a month in something that pays more than 6%, you'd do even better.


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RE: overpaying the mortgage

I already invest monthly as mentioned above, and none of which seems to be paying 6%, but I still plug away anyway.
If paying $100 a month will save me $50,000 over the life of the loan, that is a sure thing! I like to think of it diversification.
Thanks for all replies, I sure learn a lot here.
Val


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RE: overpaying the mortgage

The home is the most important investment, not only in money, but in security. You need to have it paid for when you retire. You can lose money in the stock market or by being sued, losing your job, but no one can take your home except the mortgage company for non payment or the IRS for tax problems. The home will save you from paying rent you can't afford on your retirement pay and from living in a low income area. We have a daughter who is close to 50 and doesn't own a home, she has owned two, but sold them to get the cash.


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RE: overpaying the mortgage

I'll bet if you post a question about an amortization schedule on the Computer Help forum someone will know if there is one in your software or how you can obtain one inexpensively.

Adding $100 to your monthly payment and specifying it go to the principal of your mortgage will really help. NOW, if you can swing it, make a 13th. payment every year and apply THAT amount to the principal of your mortgage. The old rule of thumb was doing just a 13th. payment over the term of the mortgage would reduce a 30 yr. note to 17-18 years... BIG SAVINGS!

But, it requires dedication, dogged pursuit of a goal, and is out of the reach of many who are really scratchin' to come up with the dough every month. Mercifully, that wasn't our circumstance, but even with an easily affordable payment it required determination and an eagle eye on the monthly budget.

(I'm pretty bad with the arithmetic, too! But I always balance the accounts to the penny, and NEVER "float" checks, ever. Understanding the principle of the amortization schedule is a far cry from actually knowing how to DO IT, lol.)

Oh, and I believe if you are sued and the verdict goes against you, you home is fair game as are all the rest of your assets. This is why "umbrella" insurance policies are so commonplace now... and we're due to look into one here. They're pretty inexpensive and if your home is paid for and consitutes a considerable chunk of your "wealth" (whose doesn't?) well worth considering.


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RE: overpaying the mortgage

Can someone explain to me what an umbrella insurance policy is , how it works and the approximate cost in Canada. Joyful guy is this up your alley?
thanks
ivamae


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RE: overpaying the mortgage

We have an umbrella policy, it covers lawsuits. It will pay for lawyers if you are sued. You have to have so much in liability to have it. If you don't have enough, raise the liability coverage on you car and your house, it wouldn't be much. Our umbrella policy costs up around $125 a year. It depends on how many cars, motorcycles, etc you have to cover. We were told at the retirement seminar there are two ways you can lose your saving, one is inadequate medical insurance the other is lawsuits.


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RE: overpaying the mortgage123

Sorry I went back and read another post. In our state, no one can take your home except the IRS or the mortgage company for non payment. If you are sued, they can put a lien against your home, but they cannot take your home. That came from a lawyer when someone in the family died. Our umbrella policy had nothing to do with our home except if someone fell and sued us, the insurance pays the legal fees and up to a million dollars if we lose.


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RE: overpaying the mortgage

Does anyone know the law in Ontario, Canada.
If sued, can anyone take your home or is it protected in anyway. How could one protect it? It wouldn't be funny to lose your home this way!
ivamae.


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RE: overpaying the mortgage

A lien against your home means someone has attached your asset. To satisfy the lien you have to come up with cash. Yes? If you have no other way to raise cash than to sell your home hasn't your home been, effectively, "taken"?

Or am I missing something really significant here?

In lawsuits, aren't the assets held in the name of the defendant considered "fair game". And isn't that the reason the really savvy and wealthy generally put their real estate holdings into trusts? Dunno.


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RE: overpaying the mortgage

You are missing something significant. A lien that cannot be used to force a sale (many cannot) means that when you sell the lien must be satisfied.
This is very different than being able to take the property and throw you out.
If you can earn more on your money than the mortgage rate (be sure to account for taxes in both cases), invest the funds and pay off the mortgage when you retire.


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RE: overpaying the mortgage

At my age I plan to stay in the home and not sell. I prefer a lein for the full amount on my property than possibly being unable to pay taxes and payments and losing my home. We had rental property one was in a low income area, I have personally seen what happens to people who have lost their savings. I do not want to live even in a good rental. I personally made sure our home was paid for when we retired. I even worked a part time job to help pay it off. The main question is will you be able to pay your mortgage payments on your retirement. I know to many people who have lost money, as much as $50,000. investing. We owe nothing except for a new car every 5 years. There are a lot of decisions to be made when you retire. My sis and her husband had a choice of $250,000 cash or a pension until they die. They opted for the cash, lost a big chunk of it investing it. Now they can't spend what they have left for vacations, a better home, etc., because the interest on their savings is their income.


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RE: overpaying the mortgage

Brickeye,

Does that mean that if someone "attaches" your home (an "asset" to you, the defendant) as the result of an unfavorable court ruling, you don't have to pay them off immediately? You may continue to live the home ("your" home) undisturbed until/IF you decide to "sell"?! Then and only until then you can "skate"? That makes no sense to me, and perhaps we're "not speaking the same language" ?

Still, if the verdict goes against you and you must liquidate assets to satisfy the court's decision how in heaven's name are you going to be able to defray the lien on your home if your "liquid" assets have been taken... ?


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RE: overpaying the mortgage

I am not brickeye, but have had experience with this. In the state of Kansas, they CANNOT take your home except for the reasons I stated above. I was involved in a trial and heard an attorney tell his client, "don't pay it, they will put a lien on your home and they won't get their money until it is sold." He must have been unhappy with the verdict. Also an inlaw's parents were in the process of building a home when the man died. His wife consulted an attorney about keeping and finishing the home or selling it. The attorney said, "you can cause an accident and lose every dime you have, but if it is invested in your home, the home is yours forever, the cannot take your home."


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RE: overpaying the mortgage

It is pretty tough to get a house in most states. There are exceptions, so ask a local attorney before even considering trying it.


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