All Forum Posts by: Rich Hupper

You'll make more putting that money in a savings account right now than you will save by making a large payment.

Quote from @Rich Hupper:

Hello I know that these loans have predetermined payment schedules for every month of the 30 yr note. My question is what if I make a large principle payment? Will the large principle payment allow my next regular payment contribute more money to principal than interest? Or do principal payment not affect the payment schedule?

Payments are posted in different ways with 30-year fixed mortgages and you usually have to tell the servicer how you want it posted when you make the payment. In your example, you have to tell them that you want it posted to principal, then it will not be applied to future payments. The initial amortization schedule that you are given will be off the monent that you don't make the payments on the exact dates that it states on the schedule. Paying early means less interest is applied to the "simple interest" form that Fannie/Freddie notes usually come in (some non-QM loans use different calculation methods like the "precomputed" method. Interest is calculated on your outstanding balance, not that amortization schedule, so paying it down will impact the interest you pay. Let's address another issue, you might not want to pay it down. What interest rate do you have on the loan? Are you paying PMI/MIP (mortgage insurance)? What other uses might you have for that money and will that yield you more than you would save by paying down the note? I don't know your situation, so I can't really do the math and give you a definitive answer, but paying down/off a mortgage often isn't the highest and best use of your money. Prior to the Standard Tax Deduction doubling during the Trump administration (not a political statements...just the time frame), more people were able to deduct mortgage interest on their taxes. Now, however, less people are Itemizing Deductions using the Schedule A in favor of using the increased Standard Deduction. It used to be that you could determine your Effective Rate (ER) by multiplying your note rate (r) X (1 - your tax bracket), or ER = r (1 - t). If you were in the 25% tax bracket and your rate was 7%, then ER = 7% ( 1 - 0.25) = 7% ( 0.75 ) = 5.25%. This only really works if you are Itemizing your deductions, but I used to get the question when I was working with wealthy clients in a bank's Private Client division. "Is it better for me to pay off my 7% mortgage or my 6% car? On the surface, the mortgage rate is higher, but when you figure that you're tax savings is to get a "net effective rate" that you're paying, it made more sense to pay off the car. Your question is more complex than one might think if you start peeling the onion. The first part of my answer directly answered the question, but the second part asked the question "should you do that?" It would take more info to answer that. I wish you well. Good luck to you.

Quote from @Rich Hupper:

Hello I know that these loans have predetermined payment schedules for every month of the 30 yr note. My question is what if I make a large principle payment? Will the large principle payment allow my next regular payment contribute more money to principal than interest? Or do principal payment not affect the payment schedule?

You may be asking the wrong question.  It appears you’re operating from an emotional need, not a financial evaluation.  Here’s the financial analysis: can you earn a higher risk adjusted return by investing the amount of money in question than you’re paying in interest?  Another words, say you’re paying interest at the rate of 5%.  You can invest in an asset of the same risk, i.e. a private mortgage owed by someone with the same credit score as you and the same equity in the property and all else is theoretically the same.  You can buy this mortgage at a discount to yield 10%. Taxes are a wash.  So financially you’re better off by double to NOT prepay principal and instead invest it in an investment paying 10%.  

This has only a limited influence on EMOTIONAL well being. That’s because many of us are debt averse - mostly because we don’t distinguish between debt used for consumer goods and debt used for appreciating, or income producing investment. However, if you’re talking about your home and NOT an investment property, the emotional well being of paying down or even fully paying off your mortgage may be far in excess of any benefit of investing the money instead. 

Much of the analysis, only touched upon here, involves RISK.  For example, I feel a lot differently about a loan I’m personally liable for and a loan that non recourse and only collateralized by the subject property.  Like buying shares of stock in a REIT.  The REIT may owe hundreds of millions of dollars on many properties, but as a shareholder it doesn’t concern you for the most part because you’re not legally responsible for the debt, it doesn’t appear anywhere near your name, and so there’s no emotion involved. 

So, are you wanting to pay down the mortgage because it satisfies an emotional need, or because it’s a good financial decision?

Quote from @Rich Hupper:

Hello I know that these loans have predetermined payment schedules for every month of the 30 yr note. My question is what if I make a large principle payment? Will the large principle payment allow my next regular payment contribute more money to principal than interest? Or do principal payment not affect the payment schedule?

Yes. Interest is calculated on the balance monthly.  A large principal payment will reduce the balance. 

Future payments will apply less to interest, more to principal.