Maximizing my mortgage pre-payment privileges

[VJ99]

Hi Sean,
For any given mortgage with a specified interest rate, the time taken to pay down the mortgage is determined mainly by one thing: how much you pay each month.
The amortization period - whether its 25 or 15 - is only used to calculate the required minimum monthly amount.
What you choose to pay above the minimum is up to you. If you pay into a 25 at the same rate as you pay into the 15, then the time taken to paydown the mortgage and the total interest paid will be the same.
How frequently you pay - weekly, bi-weekly, monthly - doesn't make a material difference for the typical mortgage. If your mortgage was in the millions, different story.
On this, I agree with TheMortgageGuy. Choose the frequency that matches your cash flow.
Also, choose the longer amortization and then make higher payments. That gives you flexibility when your cash flow gets squeezed.

To see all this for yourself, here's a spreadsheet.

http://www.archeretf.com/wp-content/...07/Mortman.xls

I'd suggest opening it on two screens and then entering your two scenarios side by side to really see that there is not a material difference.
Certainly not enough to spend this much time worrying about it.

One thing worth giving some thought to is interest rates.
3% interest rates are not going to last. You will almost certainly have a higher rate when its time to renew in five years.
To maintain your 15 year plan, you would need to bump up your monthly payments.
To minimize your pain, the best thing would be to pay as much of the mortgage off in the early years when it is bigger.
In the mortgage spreadsheet, you can input different rates for each period.
I'd suggest going to the start of year 6 and entering in a rate assumption, say 5%, and seeing what happens.

Good luck.
Vikash

[Mall Guy]

To see all this for yourself, here's a spreadsheet.

http://www.archeretf.com/wp-content/...07/Mortman.xls

I'd suggest opening it on two screens and then entering your two scenarios side by side to really see that there is not a material difference.
Certainly not enough to spend this much time worrying about it.

. . . couldn't open it but believe this gives credence to "enough said" . . . there are plenty of mortgage calculators online that running amortization schedules for various scenarios so that shouldn't be a problem . . . start with a 25 yr am, bump 10 to 15% each year, add a couple of double ups, and a lump sum as you can afford it . . .TRM will want to add that you shouldn't forget about an emergency fund (life happens fund), and maybe a little investing . . . not that hard to do better than 3%

[Cal]

I have always wondered about people using the 30 amortization period in case life happens.

If they are that concerned about having to replace a furnace or something....maybe they should not have bought so much house.

Sorry to take your thread in another direction. It is just what came to mind while reading your thread, I know it doesn't help your particular situation.

[Eclectic12]

... For any given mortgage with a specified interest rate, the time taken to pay down the mortgage is determined mainly by one thing: how much you pay each month....

What you choose to pay above the minimum is up to you.

If you pay into a 25 at the same rate as you pay into the 15, then the time taken to paydown the mortgage and the total interest paid will be the same....

You must be getting different mortgages than I have.

Every mortgage I've been offered has had a maximum limit on extra payments (annual, payments or double up). For some of the more restrictive mortgages from years past, bumping up the mortgage payments decreased the annual pre-payment privilege by the matching amount so that if one payed the maximum payment - there was no annual lump sum left.

So not only is it the interest rate, payment amount, frequency and amortization but it is also what the pre-payments allowed will be. Bottom line is the terms of the mortgage are critical as YMMV.


Then too - except for in later years after my income had increased, I found adding to the existing payments far easier to use than a lump sum at a particular time of year. Everyone is different so IMO, considering what one is likely to be able to use is an important aspect.


Cheers

[jamesbe]

^ Well BMO offers the 20/20/20 mortgage which allows you to pay down 20% (extra) of the ORIGINAL value of the mortgage each year. So in theory you could pay your 25 year mortgage in 5 years... or even less I suppose.

[OhGreatGuru]

+1 for this suggestion. As this is your first house, I'd go with the longer amortization and pay down what you can. After the 5 year term is up, you'll get a better idea of your cash flow and the amount of extra cash you can put on the mortgage. At that point, you can decide to reduce the amortization or change mortgage products (open etc).

I disagree. You should always get the shortest amortization you can comfortably afford. in OP's budget for the 15yr mortgage he still has $712/mo in discretionary prepayments that can be redirected to other needs if necessary.

[Shayne]

I disagree. You should always get the shortest amortization you can comfortably afford. in OP's budget for the 15yr mortgage he still has $712/mo in discretionary prepayments that can be redirected to other needs if necessary.

Why lock yourself into higher payments and limit your control of your cash flow? For example if can afford to pay $2,000 a month with a shorter amortization, but I take a longer one and only pay $1,000 a month. Every month I make a lump sum payment of $1,000 for the same result as the shorter amortization.

If life throws me a curve ball I can just stop making prepayments.

[cardhu]

You should always get the shortest amortization you can comfortably afford.

I'm not sure an "always" is required in this situation, but if it were, it surely wouldn’t be that ... the shorter amortization produces exactly the same financial results, but carries more risk ... why should one “always” take on more risk, if there’s no elevated reward associated with it.

I have always wondered about people using the 30 amortization period in case life happens ... If they are that concerned about having to replace a furnace or something....maybe they should not have bought so much house.

Having to replace a furnace is hardly a “life happens” event ... and someone who is on pace to pay off a mortgage in 10 years can hardly be said to have taken on “too much house” ... initiating a mortgage at a longer amortization, in the circumstances OP described, is simply a sound risk management practice ... a shorter amortization would not reduce interest expense, and would not result in paying off the mortgage any sooner ... the only advantage it offers is that it slightly (very slightly) boosts the prepayment limits ... but since the vast majority of first-time homebuyers could never, in their wildest dreams, fully utilize the prepayment opportunities already available to them, boosting those limits for that majority would seem to offer nothing of value. On the other hand, the ability to adjust cash flow, during a real life happens event, does offer value ... think of it as insurance ... and like most other forms of insurance, one hopes one never has to actually use it ... but unlike most other forms of insurance, this one is free.

You must be getting different mortgages than I have ... Every mortgage I've been offered has had a maximum limit on extra payments

Methinks you misunderstood ... I don’t believe archer meant that all mortgages are open mortgages ... obviously, prepayment privileges have limits ... it seemed to me that archer’s point (and I’m sure he’ll correct me if I’m wrong) was that how fast a mortgage gets paid off is not determined by the amortization, nor by the limits of the prepayment privileges ... rather, it is determined by the payments you make ... the amortization and the prepayment options merely establish the range within which your payments must fall ... and even then, the upper limit of that range is usually somewhat hypothetical, since the REAL limit on how much a homeowner can pay toward a mortgage is how much money they actually have ... prepayment privileges that allow one to pay as much as $5k per month do little good for someone who’s only earning $50k/yr.

^ Well BMO offers the 20/20/20 mortgage which allows you to pay down 20% (extra) of the ORIGINAL value of the mortgage each year. So in theory you could pay your 25 year mortgage in 5 years... or even less I suppose.

You have an extra “20” in there, BMO’s product is only 20/20 ... assuming an initial 25 year amortization, such a 20/20 mortgage could theoretically be paid off, in full, without incurring any penalties, in a mere 36 months ... coincidentally, a 15/15 mortgage with double-up (such as OP described) could also be paid off in 36 months ... very few homebuyers, I suspect, have the ability to make full use of such privileges ... I know I didn’t during the first 3 yrs of my homeownership.