Annual lump sum additional principal payment on mortgage or pay monthly? How much better is one over the other?
mike
mortgage. This adds up to two additional mortgage payments a year.
Rather than pay the $200 a month, would it be better to do a lump sum
payment of $2,400 at the beginning of each year, then pay the $200/
month to myself in a bank account--to save up for the following year's
lump sum payment? I have the $2,400 now, so I could start "today" and
make it an annual thing.
Clearly, it would be beneficial to do the lump sum vs. the monthly
payment to knock down the outstanding loan amount quicker. But how
much more beneficial? Significant enough to make it worthwhile over
the course of a 30 year fixed mortgage? How can I calculate the lump
sum savings vs. monthly payments?
mike
don't at all buy the statement that "a house is a great tax shelter" /
will save considerably on taxes. Perhaps that's true if one has crazy
ARM rates (I have a 30 year fixed) or a Jumbo mortgage where the
interest payments are far higher than what I pay. Could have gotten a
15 year fixed, but I felt more comfortable being able to moderate how
much, when, and if any, additional principal payments I make (who
knows where anyone's job situation will end up in this economy).
Lou
"mike" <mike...@yahoo.com> wrote in message
news:5834751d-9bf4-40cc...@k29g2000yqh.googlegroups.com...
It depends on the terms of your mortgage/ For instance, if your mortgage
calculates interest daily on the outstanding balance, the sooner you pay off
a bit of the principal, the less you'll pay in interest overall. My guess
is that if you have $2,400 now and your goal is to pay off as quickly as
possible, put the $2,400 toward the principal. Then, instead of "paying
yourself" $200 a month so that you can dump another $2,400 on the principal
in a year, put the $200 against the principal every month instead of
waiting.
All kinds of things complicate the situation. If you save $200/month in an
interest bearing account, you'll earn some interest. But you'll pay taxes
on the interest earned. But you'll pay more mortgage interest. But your
tax deduction for mortgage interest will be higher. You probably want to
minimize the mortgage interest you pay, maximize the interest you earn, and
minimize your taxes.
These are conflicting goals. If your primary goal is to pay off the
mortgage as quickly as possible regardless of tax effects and possible
interest earnings, the best strategy to pay as much as you can against the
principal as soon as you can. If you want to quantify the relative merits
of various scenarios, you can set up an amortization schedule in a
spreadsheet on that computer you typed your question on, try various payment
schedules, and see how each one works out. Or you could try some of the
online mortgage calculators, but I don't know if any of them would take the
terms of your particular mortgage into account.
A bit of a story. When I bought my first house, we had a "dry closing" -
all the paperwork was filled out and signed, but no money was released to
the builder because not everything was finished. State law said that if the
money hadn't been released, the mortgage company couldn't charge me interest
(because the mortgage company still had the money) but I had to make
payments on the principle until it was. So the first month statement comes
in the mail, and it was for something like 25 cents, or 50 cents, I don't
remember exactly it was more than thirty years ago. Anyway, I was young and
foolish and didn't have much money, so I paid that month's principal only.
I could have made the full monthly payment (the then princely sum of $550)
and if I had, I would have prepaid a boatload of principal payments and
shortened the mortgage term accordingly.
John Weiss
The earlier you make the payment, the less interest you will pay on the
remainder, and the more principal you will pay each month thereafter.
If your interest rate is 5%, the annual interest on that $2400 is $120,
or $10/month. You will pay almost $10 more in principal every month if
you pay the $2400 up front. Not a lot, but it will add up...