Faster payoff, yearly lump sum or monthly?
Member since 2019 · 58 posts · 21 votes
I have a goal to pay off a large loan in 10 years. Let’s say I have 10K available to put towards extra principal every month. Would I end up paying the loan off faster if I did one lump sum payment of 120K per year, or doing 10k every month? Seems like with amortization it makes some difference. Is there any difference or is it the same? Does one get me there faster?
@Chris Hill mathematically it would be faster to pay off 10k per month than save up 120k/year and throw it at the loan at the end of the year. Basically the quicker you pay down the principal the less principal available to accrue interest on. I’m certain Calculators online can show you the delta.
There are calculators online that should help with this. It depends on how the interest is accrued assuming your loan doesn't recast every time the balance goes down.
Out of curiosity, if you have $120K/year of extra income, why not put that towards an asset that gives you a higher return on your cash than the loan? For example, let's say your interest rate on the loan is 5% but you could invest that money that gives you 7%. That means the profits could pay the loan off and you have money left over.
Of course we don't have a full financial picture and I'm not a financial adviser. However that's why I bought my first house hack before paying off my student loans. I knew that the return from my condo was going to be greater than the student loans. Worked out well because I paid off the student loan not long after and the value of my condo has almost doubled in 6 years and rents have gone up 25% since I rented it out.
I did leave out a lot of information, sorry.
I have 14 townhomes, all with loans, and if I put 10k and snowball, they would all be paid off in about 13 years. I also have a good chunk in multiple Syndications . The goal is it within the next 10 to 13 years have the Syndications 1.75x twice over 10 years,and pay off all the townhomes and then be done.
Just trying to come up with the best snowball method. I was going to go after the highest interest rate first. Not sure if there’s a particular method to snowball which makes it go faster.
I did leave out a lot of information, sorry.
I have 14 townhomes, all with loans, and if I put 10k and snowball, they would all be paid off in about 13 years. I also have a good chunk in multiple Syndications . The goal is it within the next 10 to 13 years have the Syndications 1.75x twice over 10 years,and pay off all the townhomes and then be done.
Just trying to come up with the best snowball method. I was going to go after the highest interest rate first. Not sure if there’s a particular method to snowball which makes it go faster.
But if your tenants are paying the rents which in turn pay off the mortgages, why pay it off? Is that really a good use of your money versus buying more property? It lowers your cash on cash return.
Fair question. If those are all paid off, and the Syndications perform as anticipated, after the 10-13 year mark, I would be way past my cash flow goals. In short, I would hit my goals without needing more doors.
Fair question. If those are all paid off, and the Syndications perform as anticipated, after the 10-13 year mark, I would be way past my cash flow goals. In short, I would hit my goals without needing more doors.
Got it. There are a few ways I've paid off large debts:
1. Focus on highest interest rate because that costing you the most money.
2. What I did was focused on lower balances because it allowed me to pay them off faster. Once they were paid off, I used those payments towards other payments. For example once you pay off one loan that was costing $1,000/month, now put that $1,000 a month towards the next debt. You lived without that money so far, so why not progress. If you tackle the highest interest rate first but that balance is also your highest, it might be harder to pay off and paying off the other loans might save you more (collectively) in the long run.
3. If any have balloon payments, those might be the priority. I had 0% interest credit cards but had a due date. Therefore it was important to pay those off as quickly as possible.
4. Run different simulations with realistic expectations to determine what makes sense for you. There are many ways to pay off debts and they all get you the same spot at the end.
Alternatively you could buy more doors and then when you get to a good spot you could sell and put the equity towards your other rentals. You would be taxed so that needs to go into account but then this way you have tenants building your equity and it is "free" money.
I’m with you so far. I’ll be very disciplined. Unfortunately my one commercial loan will go up in 9 years, and that’s the biggest loan. I was thinking that one first. The rest are residential.
Do you know of a good calculator online where I can run different scenarios versus manual adding up like I’m doing now? I’m real curious what the best order would be. But I’m looking at interest rate, and what the paid off loan adds to cash flow.
Why do you want to pay it off? IF you're talking about a rental, with positive cash flow, your tenant is doing that for you already...for free. If you use your own cash, all that does is increase what you are paying for the property since your entire cost is exclusive to the cash that comes out of your pocket...not the interest, or the principle that someone/something (i.e. tenant) is the source of funds making those payments.
To clarify, the extra 10k is coming all from the rental profits. Technically yes it’s my money, and k could use it for other things, but the extra payments are definitely not from my day job. It’s all the tenants money I would be applying to pay the loans down.
My thinking was at some point when you have sufficient doors/cash flow, then pay it all down. I’m 40 and by 50, I want to quit my day job, with more than enough cash flow. If my “plan” works with the syndications and paying off the rentals, cash flow would be about 7x my living expenses and current spend.
But I like the differing opinions, keep them coming. I want to make sure I’m making the best choices.
I would just put it all in a spreadsheet and lay it out.
I agree with @Joe Villeneuve, it doesn't make sense to pay off the loans early when someone is doing it for free.
I think what I'm reading is you want a set amount of cash flow with the least amount of effort. To do that, you want to increase existing cash flow with the lease amount of properties. If it were me, I would look at buying more rentals. When you are ready to retire, consider selling off properties to then pay off your other rentals. If you want to get really creative, sell your primary (so a portion is tax free) and move into one of your rentals. Or buy a new primary and rent out your former for a few years before selling. As long as you live in the property 2 of the last five years, the money is tax free (confirm with CPA for your situation).
@Chris Hill mathematically it would be faster to pay off 10k per month than save up 120k/year and throw it at the loan at the end of the year. Basically the quicker you pay down the principal the less principal available to accrue interest on. I’m certain Calculators online can show you the delta.
Matthew thanks, that answers that question.
My goal is 45k passive a month. With 14 rentals I’m at 12k. I’d have to buy a lot of rentals to get to 45k, and that’s more doors to worry about (I self manage). Seems like it would take 20-30 years to get to 45. Maybe I’m wrong? My payoff plan would achieve it in 10-12 years, with no additional doors.
Help me understand other ways of getting to 45k in a shorter time than 12 years. Is it possible another way?
There is an online calculator app that can show you most of the variations you are looking at (www.undebt.it) It can show you the various payoff methods debt snowball(lowest balance first, debt avalanche(highest interest), cashflow(debt that have the highest impact) You can run any scenario and it will show you payoff dates for each, you only enter your account names, balances and interest rates. You also have the option to add additional payments(i.e. the 10K you mention) I have used it to figure out how to pay off my debt and its nice to see it all laid out , you can even export to excel. Not associated with the site, just an avid user The cost is small $12/year but they have a 30 trial offer.
Same thing as when you think of compounding interest-do you get more putting in $1K a month or $12K at the end of each year or the beginning of each year? If you can do a big lump sum payment now, vs bits every month vs saving up and doing a big payment at the end of the year...in that order it will save you the most money.
Matthew thanks, that answers that question.
My goal is 45k passive a month. With 14 rentals I’m at 12k. I’d have to buy a lot of rentals to get to 45k, and that’s more doors to worry about (I self manage). Seems like it would take 20-30 years to get to 45. Maybe I’m wrong? My payoff plan would achieve it in 10-12 years, with no additional doors.
Help me understand other ways of getting to 45k in a shorter time than 12 years. Is it possible another way?
There is an online calculator app that can show you most of the variations you are looking at (www.undebt.it) It can show you the various payoff methods debt snowball(lowest balance first, debt avalanche(highest interest), cashflow(debt that have the highest impact) You can run any scenario and it will show you payoff dates for each, you only enter your account names, balances and interest rates. You also have the option to add additional payments(i.e. the 10K you mention) I have used it to figure out how to pay off my debt and its nice to see it all laid out , you can even export to excel. Not associated with the site, just an avid user The cost is small $12/year but they have a 30 trial offer.
Yes 45 is a ridiculous number, but why not ;)
So just confirm, monthly payments instead of one lump sum at the end of every year would pay it faster? interest getting smaller faster correct? Would the lump sum not put me at same interest payment 12 months later?
@Chris Hill if it were me I would pay minimum payments on everything and put all the extra principal on the loan with the lowest balance and then snowball the rest… this might not save you the most interest but it puts you with free and clear properties quicker and jacks up your cashflow with each paid off property. This is assuming all loans are fixed rate & conventional. If not I would pay off the ones with the least favorable terms first (commercial loans). Good luck!
Fair question. If those are all paid off, and the Syndications perform as anticipated, after the 10-13 year mark, I would be way past my cash flow goals. In short, I would hit my goals without needing more doors.
Matthew thanks, that answers that question.
My goal is 45k passive a month. With 14 rentals I’m at 12k. I’d have to buy a lot of rentals to get to 45k, and that’s more doors to worry about (I self manage). Seems like it would take 20-30 years to get to 45. Maybe I’m wrong? My payoff plan would achieve it in 10-12 years, with no additional doors.
Help me understand other ways of getting to 45k in a shorter time than 12 years. Is it possible another way?
I have a goal to pay off a large loan in 10 years. Let’s say I have 10K available to put towards extra principal every month. Would I end up paying the loan off faster if I did one lump sum payment of 120K per year, or doing 10k every month? Seems like with amortization it makes some difference. Is there any difference or is it the same? Does one get me there faster?
The earlier you make your additional principal payments, the faster you will pay off your loan. Paying 10k extra each month starting in Jan will pay off your loan faster than if you paid an additional 120k in December. All loans recalculate, whether they are monthly or daily (as seen in HELOCs). If you pay an additional 10k per month, then the interest portion of your next months payment will be calculated based on the 10k reduced principal balance, even though your total payment will still be the same.
Not sure how handy you are with Excel, but there is an amortization template you can use that will show you precisely how much faster it will be if you make the monthly 10k payments vs the year end 120k.
You're in a good position and I personally think you are right to want to adopt a long term strategy of paying off your properties with rent money.
I did leave out a lot of information, sorry.
I have 14 townhomes, all with loans, and if I put 10k and snowball, they would all be paid off in about 13 years. I also have a good chunk in multiple Syndications . The goal is it within the next 10 to 13 years have the Syndications 1.75x twice over 10 years,and pay off all the townhomes and then be done.
Just trying to come up with the best snowball method. I was going to go after the highest interest rate first. Not sure if there’s a particular method to snowball which makes it go faster.
Ooh boy. You stirred the hornets nest of the "refi till you die" crowd. I dont think the monthly vs annual lump sum will make a big difference either way. I fully support your paying off the loans and calling it done. What most people dont realize is there is an endpoint to the game. And if you have reached it good for you! I also payed off all my properties and living with ultimate freedom and piece of mind on investment income and no debt. Until you get there you will never know the feeling. And neither will most posters here who cant get off the debt treadmill.
I did leave out a lot of information, sorry.
I have 14 townhomes, all with loans, and if I put 10k and snowball, they would all be paid off in about 13 years. I also have a good chunk in multiple Syndications . The goal is it within the next 10 to 13 years have the Syndications 1.75x twice over 10 years,and pay off all the townhomes and then be done.
Just trying to come up with the best snowball method. I was going to go after the highest interest rate first. Not sure if there’s a particular method to snowball which makes it go faster.
Ooh boy. You stirred the hornets nest of the "refi till you die" crowd. I dont think the monthly vs annual lump sum will make a big difference either way. I fully support your paying off the loans and calling it done. What most people dont realize is there is an endpoint to the game. And if you have reached it good for you! I also payed off all my properties and living with ultimate freedom and piece of mind on investment income and no debt. Until you get there you will never know the feeling. And neither will most posters here who cant get off the debt treadmill.
Let the tenant pay it off! USE THAT EXTRA DOUGH TO KEEP INVESTING!!!