[net.consumers] Prepayment of Mortgage

slb@drutx.UUCP (Sue Brezden) (11/22/85)

We prepay on our mortgage regularly.  The ability to prepay without
penalty was one of the things we looked at in deciding which lender
to go with.

The way we do it is to pay the principle on several payments ahead of
the payment we are making.  As an example of how it works, take the
following figures for a loan (highly imaginary--but the idea is there.)

     payment number     payment        interest      principle
           1             975.00         954.95         20.05
           2             975.00         954.25         20.75
           3             975.00         953.35         21.65
           4             975.00         952.85         22.15
           5             975.00         952.05         22.95
           6             975.00         951.15         23.85
           7             975.00         950.55         24.45
           8             975.00         950.00         25.00

The interest amount with each payment decreases, while the principle
increases.  By the end of the loan, each payment is mostly principle,
but at the start it is mostly interest.

So, you pay payment #1, $975.00 plus the principle on payments 2-6,
which adds up to $111.35, if I've done my addition right.  You have
now avoided the interest on those payments, which is $4763.65.  The 
next time, you pay payment #7, plus 8-12, or whatever.

The nice thing about paying it this way--rather than just a lump
sum of $100 or so each time--is that you can easily calculate when
you will get the loan paid off, how many years you are knocking 
off your loan, and how much interest you have saved.  The lender 
will give you a table with the amounts for your loan, and you just
check them off.

You need to start doing this early in the loan, when the principle
part is small.  That's the way to knock lots of years off your loan.
We paid 6 years or so of our loan in the first year.  It decreases
after that, cause the principle per month increases, and you may
not want to pay that much extra.

A warning.  You may not want to do this if your loan is assumable.
It is better financially to let someone else assume it than to pay 
it off early yourself.  Ours is not, so we aren't worrying about that.
-- 

                                     Sue Brezden
                                     ihnp4!drutx!slb

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
      To search for perfection is all very well,
      But to look for heaven is to live here in hell.   
                                       --Sting
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ray@othervax.UUCP (Raymond D. Dunn) (11/27/85)

In article <693@drutx.UUCP> slb@drutx.UUCP (Sue Brezden) writes:
>
>We prepay on our mortgage regularly.....
>
>The way we do it is to pay the principle on several payments ahead of
>the payment we are making.  As an example of how it works, take the
>following figures for a loan (highly imaginary--but the idea is there.)
>
>     payment number     payment        interest      principle
>           1             975.00         954.95         20.05
>           2             975.00         954.25         20.75
>           3             975.00         953.35         21.65
>           4             975.00         952.85         22.15
>           5             975.00         952.05         22.95
>           6             975.00         951.15         23.85
>           7             975.00         950.55         24.45
>           8             975.00         950.00         25.00
>
>The interest amount with each payment decreases, while the principle
>increases.  By the end of the loan, each payment is mostly principle,
>but at the start it is mostly interest.
>
>So, you pay payment #1, $975.00 plus the principle on payments 2-6,
>which adds up to $111.35, if I've done my addition right.  You have
>now avoided the interest on those payments, which is $4763.65.  The 
>next time, you pay payment #7, plus 8-12, or whatever.
>

I think there is a major flaw in this argument.  Are you sure that what you
think you are doing to your loan is what you are actually doing?

Seems to me that by paying the extra ($111.35) all you are doing is reducing
the amount of the PRINCIPAL (note spelling), not the TERM of the loan by the
months worth of the principal payment.  What does it say in your loan
agreement?

Let me first digress for those of you (most people I talk to) who do not
understand why the early payments pay off so little principal, and the late
payments a lot of principal:  Loan repayments are computed so that every
payment throughout the loan is the SAME AMOUNT (key point).  However in the
first month of the loan, you owe, and thus pay interest on, the full initial
amount.  In the month before the last payment, the amount you owe is just
slightly less than the payment amount, and thus the interest for that month
is very small.  All months in between are in proportion.  Thus (I hope it is
obvious) most of the first payment is interest, most of the last principal,
and the rest in between in proportion.

Now lets get back to Sue's example.  She pays her normal payment ($975) of
which $20.05 is principal.  Assuming the loan is for $100,000 over 360
months, she now owes $99979.95 and is effectively borrowing $99979.95 for
359 months.  If she pays a further $111.35, this does NOT reduce the term of
the loan by another 5 months, it only reduces the principal to $99868.60
which the lender will normally assume is still for a period of 359 months.

Now the difference in payments between $99979.95 for 359 months ($975) and
$99868.60 for the same term, will be extremely small (I do not have either
my mortgage tables nor my TI business calculator with me, but less than $1).
If she continues to pay the $975 (as if she still owed the larger amount),
she is only paying <$1 more than she should.

The loan may be payed off one month early if she is lucky, but certainly not
5 months early.

This works similarly every month she makes an extra payment.

If I am wrong, be my guest, flame away.


(By the way, why on earth would you want to repay your mortgage early down
there in the good old U.S. of A., when you get tax relief on the interest?
I'm sure your $111.35 could much more profitably be invested elsewhere!)

Ray Dunn.   ..philabs!micomvax!othervax!ray