cancel
Showing results for 
Search instead for 
Did you mean: 

does making fixed rate mortgage payments early help?

tag
Anonymous
Not applicable

does making fixed rate mortgage payments early help?

Let's assume we're dealing with a conventional 30-year fixed mortgage.

Monthly payment is due on the 1st, considered late after 15th... if late late fee applies.

So if payment is going in anywhere between the 1st and 15th no late fee & principal is reduced at regular amortized rate & all interest for a month on outstanding balance is paid.

 

So what happens if payments are made early so that the amount of principle upon which interest is calculated is reduced earlier than scheduled? I'm sure being a day or two early isn't going to effectively make much difference at all, BUT, what if you make your regular payment a month early, or 2 months early... heck what if you were 5 or 6 months ahead of the scheduled payment due date? Now we're talking about a reasonably sized reduced principle amount well ahead of schedule and so the amount of interest that should be due should based on a significantly reduced principle amount of outstanding debt.

I know that as a fixed rate mortgage payments are fixed, but shouldn't the affect of paying so much so early result in the amount of interest due being reduced & the amount of principle applied from each monthly payment be higher than what would have otherwise been listed in the amortization schedule?

 

Or, is it just a gift to the lender to be paying ahead of schedule? 

 

Message 1 of 12
11 REPLIES 11
smallfry
Senior Contributor

Re: does making fixed rate mortgage payments early help?

Use the half time advance prepayment principal approach. It doesn't hurt too bad on a 30 year until the principal and interest payments cross around year 18. Every month when you pay the odd number mortgage payment include a principal only payment for the next even month in a separate check. Get an amortization schedule. You can reduce the amount you pay by at least 40% if you only prepay through year 18.
Message 2 of 12
Anonymous
Not applicable

Re: does making fixed rate mortgage payments early help?

I know that most mortgage lenders told me that by making one extra mortgage payment per year (i.e. tax returns) you can pay off in 18-20 years... There are alot of payment calulators online that you can pay around with to give you an idea.
Message 3 of 12
Anonymous
Not applicable

Re: does making fixed rate mortgage payments early help?

Thanks -- but both replies include paying *extra* principle which while good examples to reduce total interest to end of payment term was not what I was asking about.

My question is, keeping the fixed payments constant as per the amortization schedule, but choosing to make those regularly scheduled monthly payments in advance would this reduce the interest.

 

Example to the extreme: 360 payments of $1k a month will add up to a lot of interest, but if you paid $1k a day would you have to make 360 payments or would the point of making the $1k payments in advance on this schedule allow the loan to be paid of with fewer than 360 payments?

If you still have to make 360 $1k payments then you'd be paying interest that shouldnt be due. 

 

So that is the extreme case that I think demonstrates my point.

If instead in any one tax year, you made 12 payments in January, the expected payments for the rest of the year, would this not reduce the interest compounding against the outstanding balance quicker than making payments monthly? And then the same the following year...

 

 

 

Message 4 of 12
smallfry
Senior Contributor

Re: does making fixed rate mortgage payments early help?


@Anonymous wrote:

Thanks -- but both replies include paying *extra* principle which while good examples to reduce total interest to end of payment term was not what I was asking about.

My question is, keeping the fixed payments constant as per the amortization schedule, but choosing to make those regularly scheduled monthly payments in advance would this reduce the interest.

 

Example to the extreme: 360 payments of $1k a month will add up to a lot of interest, but if you paid $1k a day would you have to make 360 payments or would the point of making the $1k payments in advance on this schedule allow the loan to be paid of with fewer than 360 payments?

If you still have to make 360 $1k payments then you'd be paying interest that shouldnt be due. 

 

So that is the extreme case that I think demonstrates my point.

If instead in any one tax year, you made 12 payments in January, the expected payments for the rest of the year, would this not reduce the interest compounding against the outstanding balance quicker than making payments monthly? And then the same the following year...

 

 

 


Go to the library you might find your answer in a book pertaining to compound interest. I really have no idea how much you would save on each "early" payment. The bank might not consider the payment early at all. 

Message 5 of 12
MattH
Senior Contributor

Re: does making fixed rate mortgage payments early help?

Mortgage loans are handled differently from how credit cards and auto loans are handled, such that usually paying before the due date has no benefit.  I suggest you spend a couple hours browsing the excellent website of the Mortgage Professor at http://www.mtgprofessor.com/ and after spending time there repost here if you still need clarification.

 

TU 791 02/11/2013, EQ 800 1/29/2011 , EX Plus FAKO 812, EX Vantage Score 955 3/19/2010 wife's EQ 9/23/2009 803
EX always was my highest when we could pull all three
Always remember: big print giveth, small print taketh away
If you dunno what tanstaafl means you must Google it
Message 6 of 12
Anonymous
Not applicable

Re: does making fixed rate mortgage payments early help?

ONE extra MORTGAGE payment per year (including principal, interest, taxes and insurance)

 

Takes 6 years off of a 30 year fixed rate mortgage.

 

Bi-weekly payments pretty much have the same effect, however some banks charge to set this up.

 

I might be off by the years...but it is at least the 6 years....I was given the offer when I bought my house....but chose to decline since I don't plan on dying in this house at 90 years old.

 

Either way one extra full payment a year can be achieved by making one extra payment in 12 months or paying bi-weekly.

 

If you plan on living in the home for the rest of your life bi-weekly (if they don't charge for it) Is the way to go.  If you plan on moving to something else the extra money would be better well spent in a high yield money market savings account.

 

The lender can give you all the particulars for your loan if you are interested.

 

 

 

Message Edited by 1111mel on 05-23-2009 10:08 PM
Message 7 of 12
Anonymous
Not applicable

Re: does making fixed rate mortgage payments early help?

I'm thinking this is the page on the posted website that applies: http://www.mtgprofessor.com/A%20-%20Amortization/how_does_simple_interest_work.htm

 

Let me see if I understand correctly.  Paying early does help but it has to be very early to help?  Since the interest that accrues is based on a balance that is only calculated once a month.  If you pay 10 days early it won't help since the interest per day is already set for those 10 days.  But if I make two payments this month, the daily interest rate for next month will be lower than it would have been had I only made one payment.  Is that correct?  Do they also typically bump out the due date if you make two payments in one month?  Like if I make two payments in May, could I skip June and not be charged a late fee or be reported late to the reporting agencies?

Message 8 of 12
MattH
Senior Contributor

Re: does making fixed rate mortgage payments early help?


@Anonymous wrote:

I'm thinking this is the page on the posted website that applies: http://www.mtgprofessor.com/A%20-%20Amortization/how_does_simple_interest_work.htm

 

Let me see if I understand correctly.  Paying early does help but it has to be very early to help?  Since the interest that accrues is based on a balance that is only calculated once a month.  If you pay 10 days early it won't help since the interest per day is already set for those 10 days.  But if I make two payments this month, the daily interest rate for next month will be lower than it would have been had I only made one payment.  Is that correct?  Do they also typically bump out the due date if you make two payments in one month?  Like if I make two payments in May, could I skip June and not be charged a late fee or be reported late to the reporting agencies?


 

With a traditional mortgage, if you make two payments in May they will treat the second payment as an early payment, so you will not be reported as late, but you will not save any interest.  If you make an extra payment and follow the lender's instructions on how to make extra principal payments, then you will save some interest and build equity faster, but you still need to make the regular payments on schedule.  Note that lenders may require extra principal payments be sent to a different address, or in some other manner flagged as not being regular payments.

 

With the car loan that I paid off in early 2008, it was different: paying more than required both reduced my interest cost and pushed back the due date of my next payment.

 

This can be complicated and confusig, but if you read the following pages with care you should have a better understanding of this.

 

http://www.mtgprofessor.com/A%20-%20Mortgage%20Payments/mortgage_payments_a_primer.htm

 

http://www.mtgprofessor.com/A%20-%20Mortgage%20Payments/will_a_large_payment_to_principal_reduce_monthly_payments.htm

 

http://www.mtgprofessor.com/A%20-%20Mortgage%20Payments/how_many_payment_a_year_can_a_borrower_make.htm

 

http://www.mtgprofessor.com/A%20-%20Mortgage%20Payments/how_would_a_truly_flexible_mortgage_work.htm

 

 

TU 791 02/11/2013, EQ 800 1/29/2011 , EX Plus FAKO 812, EX Vantage Score 955 3/19/2010 wife's EQ 9/23/2009 803
EX always was my highest when we could pull all three
Always remember: big print giveth, small print taketh away
If you dunno what tanstaafl means you must Google it
Message 9 of 12
Anonymous
Not applicable

Re: does making fixed rate mortgage payments early help?

Yes, car loans are different than mortgage loans.

 

You have to pay your mortgage payment by the 1st of the month.  You don't get credit for paying sooner.

 

My payment is $1,260...........somewhere around $250 of it is principal....If I pay an extra payment every year that $250 or so compounds that much more quickly.

 

As mortgage payments are made, each dollar changes that few cents more towards principal and less towards interest.......

Message 10 of 12
Advertiser Disclosure: The offers that appear on this site are from third party advertisers from whom FICO receives compensation.