Mortgage payments go down????

The additional payment reduces principal. The required monthly payment stays the same. The term of the loan is shortened.

E.g., if over a 360-month term you tacked $5K onto just one of your payments, you wouldn't be paying interest on that $5K for the rest of term, so more of your subsequent $1600 monthly payments would be going to principal reduction, and the term itself would be several months shorter.

www.mortgage-x.com - great for figuring out how much faster you end up paying your mortgage by paying down principal.

In general, if your mortgage is NOT an interest-only mtge, and you are paying down principal monthly, your monthly payments are kept the same if you pay extra principal. This means that if you put an extra 5k towards the principal every month, the # of total payments before the entire mtge is paid off goes down. The proportion of interest paid monthly decreases.

If you have an interest-only mortgage, and you pay 5k towards the principal every month, then your payments decrease monthly.

it depends on whether you've got a fixed or an ARM. If you've got a fixed, it behaves the way NWT outlined above.

It you've got an ARM, then every "reset" takes into account what your balance is that's left.

E.g. I have a 5/1 ARM on my condo. For the first five years, payments are steady, and then every April the loan is recalculated based on remaining principal balance and current interest rates. If in March I paid an "extra" $5,000, that gets lopped off my principal before the April recalculation.

I think at current rates, every $5K of prepay on an ARM is going to save you about $15/month in future payments, but someone should double check me on that.

ali r.
DG Neary Realty

Finance 101

nyc10023 is correct.. on a 30 yr any prepayment shortens the life of payments AT THE END. WHY ANYONE WOULD EVER PREPAY a 30yr FIXED at these levels is beyond me.
1) you lose tax deductions;
2) it tightens your financial flexibility, the entire opposite reason for going into a lower monthly 30 yr mortgage.

Now if you are a lemming, who can't stop him/herself from using that little piggie bank for prada shoes... .then what the hell are you in a leveraged depreciating asset is beyond my help.

I see. I guess that means that I am really "married" to that number (whatever my mortgage payment is.) From what it sounds like, I should be in a 30 fixed rate, right? And since I am married to that number, doesn't it make sense to put as much down as possible up front?

What you "should" be in depends on your full financial picture, but a fixed rate loan (either 30 or 15) years makes most sense given current interest rates versus historical trends and general interest rate expectations.

We did a 15 year primarily because the gap between the 15 and the 30 was 0.8-0.9% at the time we locked. (The lender we went with was offering very attractive 15s well below other banks.)

As for why you might prepay a 30-year fixed mortgage: You live below your means. You bought your property on a much lower income. You have sufficient liquidity, aren't a risky investor, plan to stay in your home awhile, and don't feel like paying 5-point-something (or more, if you bought when rates were higher) on your mortgage while getting 1-point-something on your savings account. Plus, some people do better paying down debt than they do saving.

and what about FHA loans. If I only put down 3.5%, that means I am married to that number for 30 years and it will be a much larger monthly payment, no????

If you make one extra mortgage payment per year, that will reduce the life of the loan somewhere around 6 years.

I hear a lot of people doing the "mortgage payment every 2 weeks thing) Is that what you mean by "one extra payment a year?"

Most mortgages will allow you to "pay off" part of the principal and they will recalculate your monthly payments, and you would remain at the same payment period.

This is sometimes called recasting, or a loan modification. There is usually a nominal fee to do this.

This is just a link I found: http://www.floridamortgagecorp.com/recast.htm

Um, I had a 200k mortgage once and paid down 50k one year and had the loan recast. monthly payments went down based on the new principal amount owed and my same interest rate. The payment period remained the same (was like 15 out of 360).

Usually you only do this with a decent amount of principal - I think you can only do it once or twice, if at all, depends on your mortgage and lender ... not sure.

Your payments will essentially go UP though... you lose some tax deduction.

i am making 13 payments a year and may very well stay in my apt for 23 more years...

"you lose some tax deduction."

Never pay someone else's interest, if you do not have to, just to get a tax deduction. Cash flow is more important than "getting" a tax deduction.

>> I hear a lot of people doing the "mortgage payment every 2 weeks thing) Is that what you mean by "one extra payment a year?"

That's a modified version of the one extra payment. Most of the time, the mortgage company will "charge you a fee (admin)" to do a biweekly payment instead of monthly. This has the same net effect of lowering your loan period. Both are basically "prepayment" options.

I personally would recommend getting a loan with no prepayment penalties and then once a year, perhaps at tax year end, make one additional mortgage payment. Doing that little thing will reduce your loan life by 6 years or something. Of course, if you prepay MORE than that, you can reduce it even more. (Most companies allow you to automate an additional principal payment.) But for those that live below their means or whose incomes rise significantly, this is a great way to save a lot in interest payments.