dove@mit-bug.UUCP (Web Dove) (11/16/85)
I have heard it said that one could make additional "principle only" payments if the standard monthly payment was also met. 1) Can anyone verify this? 2) Would one of you mortgage calculators figure out how much would be saved if one made a second "principle only" payment each month of say 1/2 the size of the standard payment?
ark@alice.UucP (Andrew Koenig) (11/17/85)
Whether or not you can pay additional principal (please note the spelling!)
on your mortgage depends on whether the lender allows it. This, in turn,
depends at least in part on whether the laws of your state require the
lender to allow it. In New Jersey, for example, all mortgage loans
must be prepayable in any part without penalty. Such loans are sometimes
called "simple interest" loans.
Here's how it works. On January 1, you closed on a house and got a
$100,000 loan at 12% nominal rate to finance it. Although the banks
here say the loan is 12%/year, it is really 1%/month, or, if
you like, 12%/year compounded monthly.
Thus, at the end of January, you owe the bank:
100,000 your principal as of January 1
+ 1,000 1% interest on your principal.
plus enough extra to make up the payment you agreed on (which, according
to our assumptions, is $1028.61 for a 30-year term). This extra is
$28.61 for the first payment, so after you have made this payment,
you owe the bank $99971.39. Now, at the end of February, you owe the bank
99,971.39 your principal as of February 1
+ 999.71 1% interest on your principal.
plus enough extra to bring your payment up to $1028.61. This extra is
$28.90 this time around. See, you're paying it off already! :-)
Here are the similar figures for the first year:
period balance principal interest
1 100000.00 28.61 1000.00
2 99971.39 28.90 999.71
3 99942.49 29.19 999.42
4 99913.30 29.48 999.13
5 99883.82 29.77 998.84
6 99854.05 30.07 998.54
7 99823.97 30.37 998.24
8 99793.60 30.68 997.94
9 99762.93 30.98 997.63
10 99731.94 31.29 997.32
11 99700.65 31.61 997.01
12 99669.04 31.92 996.69
The important point to realize is that on a simple interest loan
with a fixed payment and interest rate, the only thing that determines
how much time you have left to pay it off is what your principal is.
For instance, my $1028.61 payment at the end of January reduced my balance
to $99971.39. If I had paid $1086.70 instead, I would have reduced my
balance to $99913.30, and would effectively now be beginning period 4.
I would effectively have reduced the term of my loan by two months
for the cost of $58.09.
Sounds like an irresistable deal, right? Well maybe. If instead I had
taken that $58.09 and invested it at 12% a year, compounded monthly,
I would have exactly enough money 29 years and 10 months from now to
pay off the balance of the loan, two months early.
Thus it would seem that whether or not to pay off part of your mortgage
early depends on the alternative opportunities for investing the money.
But even this is not true, for two reasons: (1) if you invest the
money, you can presumably get it back if you need it before your mortgage
term expires, and (2) two alternatives that appear the same on the surface
may be very different when tax consequences are taken into account.
And here's where I must stop trying to give advice. I'm a programmer,
not a tax lawyer.suze@terak.UUCP (Suzanne Barnett) (11/18/85)
> I have heard it said that one could make additional "principle only" > payments if the standard monthly payment was also met. > > 1) Can anyone verify this? Certainly, one CAN make additional principal only payments. However, the fine print in many loans calls for penalty payments if the loan is paid off early. For mortgages I believe this is suspended if the property is sold. I also believe that FHA and (I know) VA require that there NOT be a penalty for early payment. -- ************************************************************** Suzanne Barnett-Scott uucp: ...{decvax,ihnp4,noao,savax,seismo}!terak!suze phone: (602) 998-4800 us mail: CalComp/Sanders Display Products Division (Formerly Terak Corporation) 14151 N 76th street, Scottsdale, AZ 85260
woods@hao.UUCP (Greg Woods) (11/18/85)
> I have heard it said that one could make additional "principle only" > payments if the standard monthly payment was also met. It really depends on the terms of the individual loan. If you have an FHA loan, then this is indeed the case, for such loans have no penalty for early payment. In fact, you can repay the entire loan at any time with no penalty. Some loans have substantial penalties for early payback, however, so I would advise you to check with the mortgage company first before making any assumptions (pun intended :-). --Greg -- {ucbvax!hplabs | allegra!nbires | decvax!noao | mcvax!seismo | ihnp4!noao} !hao!woods CSNET: woods@NCAR ARPA: woods%ncar@CSNET-RELAY
gordon@cae780.UUCP (Brian Gordon) (11/19/85)
In article <480@mit-bug.UUCP> dove@mit-bug.UUCP (Web Dove) writes: >I have heard it said that one could make additional "principle only" >payments if the standard monthly payment was also met. > >1) Can anyone verify this? It varies with the lender, but some form of it is quite common. There are often (usually?) limits on how much you can pre-pay in a geven period. >2) Would one of you mortgage calculators figure out how much would be >saved if one made a second "principle only" payment each month of say >1/2 the size of the standard payment? Well, on a 12% loan on $100,000 for 30 years, you pay it off in the 12th month of the 30th year, having paid $270,300.53 in interest, and payments were $1,028.61 per month. If you up that to $1,542.92 per month, you pay it off in the 9th month of the 9th year (yes 9 - not 19 or 29), having paid $61,958.03 in interest. FROM: Brian G. Gordon, CAE Systems Division of Tektronix, Inc. UUCP: tektronix!teklds!cae780!gordon {ihnp4, decvax!decwrl}!amdcad!cae780!gordon {nsc, hplabs, resonex, qubix, leadsv}!cae780!gordon USNAIL: 5302 Betsy Ross Drive, Santa Clara, CA 95054 AT&T: (408)727-1234 Down 69 1/4 pounds and holding ...