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Question on making my house payment...


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#1 of 24 OFFLINE   Patrick G

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Posted November 01 2004 - 03:12 AM

Our mortgage company sent me a letter about its “Loan Accelerator Program” whereby instead of making my mortgage payment once a month, they would automatically deduct it from my checking account not once a month, but half the amount twice a month, and this would allow me to pay off the loan much faster. I have heard this is the thing to do, but there is a “Program Fee” of $9/month involved + a one time fee of $49. Why should I have to pay these fees just to make 2 payments a month. Is this typical? Should I do this?
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#2 of 24 OFFLINE   Scott Merryfield

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Posted November 01 2004 - 03:32 AM

You can get the same result by paying a little more on each monthly installment and avoid the fees your mortgage company is trying to bilk from you. By paying bi-weekly, you are making the equivalent of 13 monthly payments (26 half payments). Simply divide your monthly payment by 12, and then add the result to each monthly payment.

#3 of 24 OFFLINE   Kenneth

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Posted November 01 2004 - 03:55 AM

If you have Excel you can play with the PPMT function which allows you to calculate payments at fixed interest rates for different periods of time. I am sure there are some online calculators also. With long term high value purchases the frequency of payments can make quite a difference because of the compounding of the interest.

As mentioned by Scott, you can reduce it substancially by overpaying the monthly payment or by making lump sum payments at certain intervals (if those are allowed). Those go directly to the principle and reduce the interest payments which are generally spread out over the length of the loan.

Kenneth

#4 of 24 OFFLINE   John Alvarez

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Posted November 01 2004 - 04:06 AM

Quote:
Those go directly to the principle and reduce the interest payments which are generally spread out over the length of the loan.

Not always. Some places will actually put it toward the intrest of the next payment first. You have to make sure you state the extra goes to the principle and that's accepted according to your loan papers.

#5 of 24 OFFLINE   shaniceMW

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Posted November 01 2004 - 12:46 PM

when you make extra payments toward your principle, please make sure that there are no prepayment penalties. some mortgage companies charge a fee for paying towards the principles. this has hurt quite a few people that i know. they were able to resolve it though. but please make sure. karl jeacle has an excellent calculator. dont have the url right now, but if you search for jeacle mortgage calculator, it will come up. you can do difference scenarios regarding paying extra monthly, yearly, prepayments, etc. hope everything works out. but that 9 buck a month could be going towards your principle too.

#6 of 24 OFFLINE   Glenn Overholt

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Posted November 01 2004 - 02:28 PM

Patrick, did they say semi-monthly, as you said, or did you mean bi-weekly?

The bi-weekly is faster, but I would plot out all of next year to try it out, because you WILL be paying out an extra payment with bi-weekly, and if it comes at the wrong time, you might find out that you are a little bit short on cash until your next payday.

I have heard others say that the best thing to do (if they will put it onto your principle), is to round up your payment. If it is $830, pay out $850 or even $900. if you can. You'll make out much better that way.

#7 of 24 OFFLINE   Todd Hochard

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Posted November 01 2004 - 03:45 PM

Almost all of the Accelerated programs are paid every two weeks, not twice a month. Twice a month payments would reduce a 30 year mortgage by a few months at most, hardly worth the trouble. Bi-weekly amounts to 13 full payments/year, so it's pretty easy to see where the savings comes in.

Here's a question, though- why in the world would you pay your bank a $49 fee, and $108 per year, EVERY year, to do this. Your best bet- make one full payment to principal, at the beginning of the year. You'll make out even better than the bi-weekly setup.

Here's another tip, though- if you're paying under 6% on your home mortgage, I wouldn't even pay it down any faster than required, until you've-
1. Paid off all vehicles.
2. Paid off all credit cards.
3. Paid off all other debt.
4. Funded your 401k/retirement to at least 10% of your gross.

If you've not gotten to all those things, then I wouldn't even bother. It's the cheapest money you'll ever borrow over the long term. Unless, of course, you live in a real estate market that's priced outrageously, where you think prices might actually fall in the future. Then prepay till your comfortable.

Todd

(not a financial professional)
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#8 of 24 OFFLINE   Patrick Sun

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Posted November 01 2004 - 04:01 PM

When I re-fi'd to 6% about 2 years ago, I continued paying my old monthly mortgage payment amount (with the higher interest rate), rounded up to the nearest hundred, and I end up paying about $230 more towards the principle each month this way. This knocks $2760 off my loan amount each year, and that's on top of the smaller principle amount that is paid down within the normal monthly mortgage payments, and each year my monthly mortgage payment gets smaller, and this allows me to pay down more on the loan amount by keeping my self-imposed mortgage payment the same as my original mortgage at the higher rate.

I have no other debt (car's paid for, no credit card debt), so I can do this, and I max out my 401K contribution (plus get the company 4.5% match), and my Roth IRA contribution as well. Planning and frugality can take a load off uncertain employment prospects in the future as well.
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#9 of 24 OFFLINE   Drew Bethel

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Posted November 01 2004 - 04:23 PM

Keep in mind that paying off a mortgage ahead of time is really only be truly useful if you will be in that house for a while. If you can see yourself moving within, say five years, then you're better off investing that extra payment elsewhere.
"The man who views the world at 50 the same as he did at 20 has wasted 30 years of his life." Muhammed Ali, (Cassius Clay)

#10 of 24 OFFLINE   Jason L.

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Posted November 01 2004 - 04:29 PM

John,

With my Mortgage Company, unless you specify "Additional Principal", any additional monies sent will be applied to "Additional Escrow", not next month's interest.

#11 of 24 OFFLINE   Scott Merryfield

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Posted November 02 2004 - 12:37 AM

Quote:
Almost all of the Accelerated programs are paid every two weeks, not twice a month. Twice a month payments would reduce a 30 year mortgage by a few months at most, hardly worth the trouble.

My comments were based on assuming Patrick meant bi-weekly, not twice per month. As you said, Todd, twice per month is not worth the bother, especially if the mortgage company wants to charge extra fees for this "service".

I also agree that you usually should not be paying extra on your mortgage until you have at least paid off other higher interest debt and fully funded your 401K and Roth IRA. If you carry a monthly balance on a credit card, that's where your extra payment amount should be applied. Our financial advisor frowns on us paying anything extra on our mortgage, but I still round up the payment to the next $50 increment. It doesn't make much difference, but I like nice round numbers. Posted Image

#12 of 24 OFFLINE   AjayM

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Posted November 02 2004 - 01:47 AM

Guys, it doesn't matter if it's twice a month, once a month, every day of the month. The end result is that you pay X dollars at the end of the year. The old saying is that if you make an extra payment every year you reduce your mortgage by half, which today with low interest rates usually doesn't apply. For instance, say you have the $1200/mo mortgage at 6% for 30 years. It means the following;
You financed $200,150 at 6%
Monthly Payment = $1200 x 360 payments (30 years)
You will pay $231,850.14 in interest.

If you add an extra $100/month here towards principal here are the stats;
Your 30 year loan turns into a 24.5 year loan, instead of 360 payments you pay 295 payments.
You pay $182,703 in interest saving you roughly $50k in interest payments.

How about if you pay one lump sum every year of $1200? Here are the stats;
Your 30 year loan turns into a 24.75 year loan or instead of 360 payments you make 297 payments.
You pay $184,532 in interest (costing you an extra $2k over sending in smaller payments every month).

If you yank the interest rate up is where you see the difference in extra payments. For instance if you have a 12% loan with a $1200/month payment, that extra $100/month saves you 11 years instead of 4-5 years (granted you lost almost $100k in borrowing power).

Also, as mentioned, if you are paying extra money towards your home loan yet carry balances on your 12-15-20-more percent credit cards you need to be hauled out back and beaten with a calculator Posted Image You always want to pay off high-interest credit before low interest credit.

#13 of 24 OFFLINE   Philip Hamm

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Posted November 02 2004 - 01:56 AM

Talk to a financial advisor. It's almost always a better idea to just send extra principle.
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#14 of 24 OFFLINE   Todd Hochard

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Posted November 02 2004 - 04:39 AM

Quote:
(costing you an extra $2k over sending in smaller payments every month).
Only if you send the extra $1200 in at the END of the year, instead of the beginning. If sent in the beginning, the savings go the other way.
I love to singa, about the moon-a, and the june-a, and the springa...
-Owl Jolson

#15 of 24 OFFLINE   Glenn Overholt

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Posted November 02 2004 - 05:13 AM

Of course, you have to weigh all of that against how much you expect to be making in 20 years. By then your mortgage payment might be so low it might seem like a joke!

Glenn

#16 of 24 OFFLINE   AjayM

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Posted November 02 2004 - 05:14 AM

Quote:
Only if you send the extra $1200 in at the END of the year, instead of the beginning. If sent in the beginning, the savings go the other way.

True, but your very first mortgage payment will be $2400 instead of $1200 (which may be a bit of a swing considering all the other buying-a-house expenses). And most of the savings come from the fact that you make 1 extra $1200 payment over the course of the loan.

Either way on a 6% loan, extra payments don't really add up to significant savings. I'm not a financial advisor, but if I were I'd have a hard time recommending extra payments to most people. Hell that $1200/yr put into the stock market will yield better results over 30 years. But even past that, I say take that $100/month and put it in the monthly "take the spouse out to dinner" fund, or save it for a year and take a nice vacation/cruise every year, etc. Both will yield better results, maybe not from a money standpoint, but from an enjoying life standpoint.

Andrew

#17 of 24 OFFLINE   Bry_DD

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Posted November 02 2004 - 11:15 AM

That one extra money you pay every year can accumulate more interest in the bank or invest it somewhere else. And if you say you'll end up paying your loan up before 30 yrs you can add up all the extra payment you've maid up to 20 yrs plus the tax benefits you get and you can still pay off your mortgage after 20 to 23 yrs plus you'll have some more extra in the bank.

Anyone here heard about the Power Option Loan? want to save some money on your mortgage? drop me a line and i'll explain the Power Option Loan with no obligation what so ever.

Brian

#18 of 24 OFFLINE   Drew Bethel

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Posted November 02 2004 - 11:36 AM

All good points above. Your decision must be made on how diversified your portfolio is. You DON'T want all of your monies tied up in any SINGLE investment.

There are a lot of people taking about a bunch of loans doing dozens of improvements in the name of improving the value of their home. While that is correct, they're also socking money away into an illiquid asset.

Cash is still king but there is a cost for liquidity. Look at where your money is tied up, the real estate maket in your area, where interest rates aer today and where they may go, how long you will be in that house...and make your decision!
"The man who views the world at 50 the same as he did at 20 has wasted 30 years of his life." Muhammed Ali, (Cassius Clay)

#19 of 24 OFFLINE   shaniceMW

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Posted November 02 2004 - 11:39 AM

brian, are you talking about cofi loans? if so, i have a few clients doing that. they are good for some. i have concerns because there is only one bank driving the rate.

#20 of 24 OFFLINE   Scott Tucker

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Posted November 02 2004 - 11:40 AM

Sell the house, pay off the mortgage, buy a motorhome and move to Big Sky.
"He's right. The ear's hacked off." Mr. Pink from Reservoir Dogs.


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