Mortgage - Lump Sum or Extra Monthly Prinicipal?

[twinmomma]

I'm trying to figure out the best way to pay down our mortgage faster. 

Right now I have $15,000 that I can put towards the mortgage principal. We only owe $140k on the mortgage overall. 

Is it better to make a large one time lump sum payment with that money? Or is it better to add on extra to the principal each month? 

The calculators on the mortgage website make it seem like the monthly payment is better, but that doesn't make sense to me. My gut says it's better to pay down in a lump sum. But I admittedly don't really understand how all the interest calculations work. 

Thanks!

[ohgillian]

You're going to come out better by making a lump sum payment, versus making the same amount divided over multiple payments. I just tested it in my mortgage amortization spreadsheet to be sure. If you are Excel-minded at all, I recommend a mortgage amortization worksheet. I use the one I'll link below; I customized mine to show how much interest I've saved since the beginning, subtotals by year, total interest saved, etc.

[This is assuming that putting the money into the mortgage at all is even a good idea, which depending on your rate and other factors, may or may not be the case.]

Direct download link: www.mortgageretirementprofessor.com//Spreadsheets/Xtrapmts.xls
Or, go to this page and click on "Extra Payments on Monthly Payment Fixed-Rate Mortgages": www.mortgageretirementprofessor.com//spreadsheets.htm

[tealblue]

Dec 26, 2023 10:49:42 GMT -5 ohgillian said:

You're going to come out better by making a lump sum payment, versus making the same amount divided over multiple payments. I just tested it in my mortgage amortization spreadsheet to be sure. If you are Excel-minded at all, I recommend a mortgage amortization worksheet. I use the one I'll link below; I customized mine to show how much interest I've saved since the beginning, subtotals by year, total interest saved, etc.

[This is assuming that putting the money into the mortgage at all is even a good idea, which depending on your rate and other factors, may or may not be the case.]

Direct download link: www.mortgageretirementprofessor.com//Spreadsheets/Xtrapmts.xls
Or, go to this page and click on "Extra Payments on Monthly Payment Fixed-Rate Mortgages": www.mortgageretirementprofessor.com//spreadsheets.htm

I agree with this! It’d be better to do a lump sum if you are interested in paying down your mortgage.

I also agree that you may get a better return if you have or open a high yield savings account. I have one through capital one at 4.5% and my mortgage is less than 3%.

[twinmomma]

I wish we had a low mortgage rate to play with! We just bought this year, so we are at 6.375%. Definitely want to pay it down quickly if possible.

Thank you both for clarifying! I'm not sure what I did on the mortgage company's website to make the lump sum work out worse than the extra payments when I was using their calculator. We'll go lump sum. 

[quesyrah]

I was going to ask the same question so I’m following along for the advice.

Our mortgage has a prepayment penalty. Is that common? It still makes more sense to pay it off but I’m wondering if we should refinance first?

[niq]

I think if you have the chunk of money, lump sum is easier to do than an extra $1000 month, unless you've got an easy way to set up automatic savings to checking transfers etc...

... but unless you took out your mortgage in the past 18 months, you're probably better off putting it in the market? Or maybe even something like CDs?

[mrsGreeko]

Since it’s over $10k, it might be worth exploring if recasting your mortgage actually works out better for you. www.rocketmortgage.com/learn/recast-mortgage

[sadlebred]

Dec 26, 2023 18:26:50 GMT -5 mrsGreeko said:

Since it’s over $10k, it might be worth exploring if recasting your mortgage actually works out better for you. www.rocketmortgage.com/learn/recast-mortgage

i was also going to recommend this. You might want to wait 6 months to see if rates come down. A lot of finance experts think they will in the new year as the Fed isn't likely to raise interest rates again any time soon since inflation has cooled.

[quesyrah]

Dec 26, 2023 16:32:19 GMT -5 niq said:

I think if you have the chunk of money, lump sum is easier to do than an extra $1000 month, unless you've got an easy way to set up automatic savings to checking transfers etc...

... but unless you took out your mortgage in the past 18 months, you're probably better off putting it in the market? Or maybe even something like CDs?

Can you explain more? Why would you not want to pay off your house?

[agnes]

Dec 26, 2023 23:44:28 GMT -5 quesyrah said:

Dec 26, 2023 16:32:19 GMT -5 niq said:

I think if you have the chunk of money, lump sum is easier to do than an extra $1000 month, unless you've got an easy way to set up automatic savings to checking transfers etc...

... but unless you took out your mortgage in the past 18 months, you're probably better off putting it in the market? Or maybe even something like CDs?

Can you explain more? Why would you not want to pay off your house?

If you have a low interest you’d be better off investing the money with a higher rate of return. 

so for me, my mortgage rate is 2.6%, but my savings account is a better option of 4.5%

[twinmomma]

We actually did already recast the mortgage once - we bought this house, then sold a house a couple months later. So when we had the huge payment from the house sales proceeds we recasted to lower our monthly payments.

At this point, the balance is low enough ($143k) and the interest rate is high enough (6.375%) that we don't want to recast, we'd rather just pay it down and be done with it early. Since we just purchased this year, we have 30 years ahead of us with these payments, so getting rid of it earlier would be great!

[jewel]

Dec 26, 2023 23:44:28 GMT -5 quesyrah said:

Dec 26, 2023 16:32:19 GMT -5 niq said:

I think if you have the chunk of money, lump sum is easier to do than an extra $1000 month, unless you've got an easy way to set up automatic savings to checking transfers etc...

... but unless you took out your mortgage in the past 18 months, you're probably better off putting it in the market? Or maybe even something like CDs?

Can you explain more? Why would you not want to pay off your house?

My mortgage interest rate is 1.99% and my savings rate is currently 4.75%. We’re making more money keeping it in savings than we would save by paying down or paying off the house.

[niq]

Dec 26, 2023 23:44:28 GMT -5 quesyrah said:

Dec 26, 2023 16:32:19 GMT -5 niq said:

I think if you have the chunk of money, lump sum is easier to do than an extra $1000 month, unless you've got an easy way to set up automatic savings to checking transfers etc...

... but unless you took out your mortgage in the past 18 months, you're probably better off putting it in the market? Or maybe even something like CDs?

Can you explain more? Why would you not want to pay off your house?

Oh, it depends a lot on whether or not you itemize, and I guess a lot of people don't itemize after the 2017 tax changes...

In general for long-term low-interest debt like mortgages, you are better off putting a chunk of change into higher yield investments than 3%, and paying off the balance of the mortgage in the future, vs paying down the loan. That said, a lot of people really like the peace of mind of less debt, and if you got all the way to paying it off completely, having no mortgage payment is really appealing!

I can't find an online calculator that exactly matches this question. This one tries to answer the question "should I pay more towards my mortgage or put money into investments instead"

www.huntington.com/Personal/Calculators-Educators/budgeting-calculators/pay-off-debt-or-invest

ETA I just saw the rate on the OPs mortgage ... that's actually kind of a tough call vs the market. I think risk-adjusted, paying down 6.4% debt is worth doing.

[quesyrah]

Dec 27, 2023 11:30:12 GMT -5 jewel said:

Dec 26, 2023 23:44:28 GMT -5 quesyrah said:

Can you explain more? Why would you not want to pay off your house?

My mortgage interest rate is 1.99% and my savings rate is currently 4.75%. We’re making more money keeping it in savings than we would save by paying down or paying off the house.

Do you plan to have a mortgage in retirement then? Or with making the regular monthly payment you’ll be mortgage-free?

I was thinking continue investing 15%, pay off the mortgage and then we have even more to invest and we’re mortgage free by retirement.

Maybe I need to re do my math.

[midwestmama]

For those recommending investing, if their mortgage rate is low, are you assuming the investment would be long term? I'm just thinking that a short-term investment vehicle (e.g., 12-month CD) would not have better returns than paying a large lump sum (amount such as OP mentioned) on the principal. For example, I looked at a calculator through my loan provider, and if I paid $15K on my mortgage right now (current loan balance is $207K, we have about 10 years left on a 15-year mortgage at 3.25% interest (though we've already cut 1.5 years off the loan through prepayments)), it would instantly cut $5600 in interest off the life of the loan. That's way more than I would make on a 12-month CD ($15K) at 5% interest (not quite $800).

[jewel]

Dec 28, 2023 15:54:52 GMT -5 midwestmama said:

For those recommending investing, if their mortgage rate is low, are you assuming the investment would be long term? I'm just thinking that a short-term investment vehicle (e.g., 12-month CD) would not have better returns than paying a large lump sum (amount such as OP mentioned) on the principal. For example, I looked at a calculator through my loan provider, and if I paid $15K on my mortgage right now (current loan balance is $207K, we have about 10 years left on a 15-year mortgage at 3.25% interest (though we've already cut 1.5 years off the loan through prepayments)), it would instantly cut $5600 in interest off the life of the loan. That's way more than I would make on a 12-month CD ($15K) at 5% interest (not quite $800).

You have to assume investment returns for the same amount of time as your mortgage. So if you compare rates for a $15k lump sum now vs compound interest for 10 years on $15k in a high yield savings. At the current savings rates, you’d be up around $8k in interest in the same amount of time.

The big unknown is how savings rates will go. My current philosophy is to invest for as long as savings rates are higher than my mortgage rate. If they ever dip below while I still have a mortgage, I can always withdraw a big lump sum from that savings and move it to my mortgage and still be ahead of what I’d have been by making that same lump payment to the mortgage at the beginning.

There’s always an ongoing conversation about peace of mind of paying off your mortgage ASAP. And some people feel better about extra cash in the bank instead. What is “better” for any person is not necessarily just based on what the calculator says.

[quesyrah]

Dec 28, 2023 15:54:52 GMT -5 midwestmama said:

For those recommending investing, if their mortgage rate is low, are you assuming the investment would be long term? I'm just thinking that a short-term investment vehicle (e.g., 12-month CD) would not have better returns than paying a large lump sum (amount such as OP mentioned) on the principal. For example, I looked at a calculator through my loan provider, and if I paid $15K on my mortgage right now (current loan balance is $207K, we have about 10 years left on a 15-year mortgage at 3.25% interest (though we've already cut 1.5 years off the loan through prepayments)), it would instantly cut $5600 in interest off the life of the loan. That's way more than I would make on a 12-month CD ($15K) at 5% interest (not quite $800).

You are smarter than I am, but this is how I’ve been looking at it. I just can’t see how I’m going to make more in investments than what I’ll save by paying off my mortgage. I’ve been using online calculators though so I thought maybe I was just way off.

Putting just an extra $2,000 annually towards my principal saves me almost $27,000 in interest and shaves 9 years off my payoff date.

[jewel]

Dec 28, 2023 12:19:02 GMT -5 quesyrah said:

Dec 27, 2023 11:30:12 GMT -5 jewel said:

My mortgage interest rate is 1.99% and my savings rate is currently 4.75%. We’re making more money keeping it in savings than we would save by paying down or paying off the house.

Do you plan to have a mortgage in retirement then? Or with making the regular monthly payment you’ll be mortgage-free?

I was thinking continue investing 15%, pay off the mortgage and then we have even more to invest and we’re mortgage free by retirement.

Maybe I need to re do my math.

We refinanced in 2020 to 1.99% for 10 years, with the goal of being paid off by the time my oldest kid is driving, freeing up money for cars and then college. My kid will be 16 in 2030 so that should work for us.

Originally, I’d been sending a lot of extra money to the mortgage but once savings rates rose higher than our mortgage rate, i started putting that money into a HYS instead. If we decide to pay off early, we can always take it out of the HYS and will still be ahead, with the compound interest earned over that time. If savings rates drop below our mortgage rate, I’ll rethink things at that point.

[jewel]

Dec 28, 2023 16:21:40 GMT -5 quesyrah said:

Dec 28, 2023 15:54:52 GMT -5 midwestmama said:

For those recommending investing, if their mortgage rate is low, are you assuming the investment would be long term? I'm just thinking that a short-term investment vehicle (e.g., 12-month CD) would not have better returns than paying a large lump sum (amount such as OP mentioned) on the principal. For example, I looked at a calculator through my loan provider, and if I paid $15K on my mortgage right now (current loan balance is $207K, we have about 10 years left on a 15-year mortgage at 3.25% interest (though we've already cut 1.5 years off the loan through prepayments)), it would instantly cut $5600 in interest off the life of the loan. That's way more than I would make on a 12-month CD ($15K) at 5% interest (not quite $800).

You are smarter than I am, but this is how I’ve been looking at it. I just can’t see how I’m going to make more in investments than what I’ll save by paying off my mortgage. I’ve been using online calculators though so I thought maybe I was just way off.

Putting just an extra $2,000 annually towards my principal saves me almost $27,000 in interest and shaves 9 years off my payoff date.

You can put the same numbers into a savings calculator. Mathematically, if the savings rate is always higher than the mortgage rate, then you will save more $ by investing.

For example, I don’t know your exact numbers but say you out that $2000 a year into a HYS at 4.75%. Once you get to the point in your mortgage where you’re 9 years from end, you can take the lump sum from your savings and pay off the mortgage, saving that same 9 years and $27k. BUT you will also have money left over in savings, the difference in interest between your mortgage and savings rates.

It’s unlikely that savings rates will stay that high for the next 30 years, but that’s the explanation on why it would be better to save than pay off your mortgage at times.

www.bankrate.com/banking/savings/compound-savings-calculator/

[quesyrah]

Dec 28, 2023 16:31:40 GMT -5 jewel said:

Dec 28, 2023 16:21:40 GMT -5 quesyrah said:

You are smarter than I am, but this is how I’ve been looking at it. I just can’t see how I’m going to make more in investments than what I’ll save by paying off my mortgage. I’ve been using online calculators though so I thought maybe I was just way off.

Putting just an extra $2,000 annually towards my principal saves me almost $27,000 in interest and shaves 9 years off my payoff date.

You can put the same numbers into a savings calculator. Mathematically, if the savings rate is always higher than the mortgage rate, then you will save more $ by investing.

For example, I don’t know your exact numbers but say you out that $2000 a year into a HYS at 4.75%. Once you get to the point in your mortgage where you’re 9 years from end, you can take the lump sum from your savings and pay off the mortgage, saving that same 9 years and $27k. BUT you will also have money left over in savings, the difference in interest between your mortgage and savings rates.

It’s unlikely that savings rates will stay that high for the next 30 years, but that’s the explanation on why it would be better to save than pay off your mortgage at times.

www.bankrate.com/banking/savings/compound-savings-calculator/

Thank you for explaining that.

Financial security and having extra money is still new to me so I’m still trying to figure out the best thing to do with our money!

It’s hard to figure it all out

[sadlebred]

There is also the mental aspect of paying a lump sum---comfort knowing your mortgage balance is lower.

[ohgillian]

Dec 28, 2023 18:26:31 GMT -5 quesyrah said:

Dec 28, 2023 16:31:40 GMT -5 jewel said:

You can put the same numbers into a savings calculator. Mathematically, if the savings rate is always higher than the mortgage rate, then you will save more $ by investing.

For example, I don’t know your exact numbers but say you out that $2000 a year into a HYS at 4.75%. Once you get to the point in your mortgage where you’re 9 years from end, you can take the lump sum from your savings and pay off the mortgage, saving that same 9 years and $27k. BUT you will also have money left over in savings, the difference in interest between your mortgage and savings rates.

It’s unlikely that savings rates will stay that high for the next 30 years, but that’s the explanation on why it would be better to save than pay off your mortgage at times.

www.bankrate.com/banking/savings/compound-savings-calculator/

Thank you for explaining that.

Financial security and having extra money is still new to me so I’m still trying to figure out the best thing to do with our money!

It’s hard to figure it all out

I’ve learned SO much from these boards over the years!

[quesyrah]

Dec 28, 2023 19:38:37 GMT -5 ohgillian said:

Dec 28, 2023 18:26:31 GMT -5 quesyrah said:

Thank you for explaining that.

Financial security and having extra money is still new to me so I’m still trying to figure out the best thing to do with our money!

It’s hard to figure it all out

I’ve learned SO much from these boards over the years!

I am learning tons and I appreciate the posters that are willing to explain things that others (me lol) may not understand.

[ohgillian]

quesyrah, definitely not just you.

[midwestmama]

Dec 28, 2023 16:31:40 GMT -5 jewel said:

Dec 28, 2023 16:21:40 GMT -5 quesyrah said:

You are smarter than I am, but this is how I’ve been looking at it. I just can’t see how I’m going to make more in investments than what I’ll save by paying off my mortgage. I’ve been using online calculators though so I thought maybe I was just way off.

Putting just an extra $2,000 annually towards my principal saves me almost $27,000 in interest and shaves 9 years off my payoff date.

You can put the same numbers into a savings calculator. Mathematically, if the savings rate is always higher than the mortgage rate, then you will save more $ by investing.

For example, I don’t know your exact numbers but say you out that $2000 a year into a HYS at 4.75%. Once you get to the point in your mortgage where you’re 9 years from end, you can take the lump sum from your savings and pay off the mortgage, saving that same 9 years and $27k. BUT you will also have money left over in savings, the difference in interest between your mortgage and savings rates.

It’s unlikely that savings rates will stay that high for the next 30 years, but that’s the explanation on why it would be better to save than pay off your mortgage at times.

www.bankrate.com/banking/savings/compound-savings-calculator/

Thank you for clarifying and sharing that example.  I need to think more about this and run some numbers, as DH and I are planning to pay off his truck in April.  We were planning to take the truck payment $ and make monthly mortgage principal payments, but now I wonder if we should open a HYS and deposit the $ in there instead.  (ETA:  It would be about $1K a month, so the balance would add up quickly, and interest would continue to increase as the balance grows.)

[RockNVoll]

I wanted to add one additional thought to this thread. We are in a unique time where savings accounts rates are higher than many people's mortgage rates and, as others have noted, sticking money in the bank in that scenario does work out better mathematically over the time frame that savings rates stay high. I noticed though that no one mentioned stock market investing here and that's what you'd normally consider in lieu of paying down the mortgage faster. You don't need some complicated investing strategy either; just put any extra you have into S&P 500 index fund and let it ride. Over 30-year time periods, the average stock market returns are 7%+ and not nearly as risky as novice investors might think.

I'll just link two short articles here that hopefully paint a clearer picture. I'm a big advocate for learning about and getting comfortable with basic investing (i.e., just buying some index funds!) because it's how you can really make your money work for you and build wealth. Sticking everything in a savings account isn't going to do that.

www.sofi.com/learn/content/average-stock-market-return/
awealthofcommonsense.com/2016/05/deconstructing-30-year-stock-market-returns/

[jewel]

Dec 28, 2023 18:26:31 GMT -5 quesyrah said:

Dec 28, 2023 16:31:40 GMT -5 jewel said:

You can put the same numbers into a savings calculator. Mathematically, if the savings rate is always higher than the mortgage rate, then you will save more $ by investing.

For example, I don’t know your exact numbers but say you out that $2000 a year into a HYS at 4.75%. Once you get to the point in your mortgage where you’re 9 years from end, you can take the lump sum from your savings and pay off the mortgage, saving that same 9 years and $27k. BUT you will also have money left over in savings, the difference in interest between your mortgage and savings rates.

It’s unlikely that savings rates will stay that high for the next 30 years, but that’s the explanation on why it would be better to save than pay off your mortgage at times.

www.bankrate.com/banking/savings/compound-savings-calculator/

Thank you for explaining that.

Financial security and having extra money is still new to me so I’m still trying to figure out the best thing to do with our money!

It’s hard to figure it all out

Yeah - absolutely!

It’s funny, because awhile ago there was a mortgage thread and I said I was still dumping extra money into my mortgage, even knowing saving or investing was “better” because I REALLY wanted to be mentally free of a mortgage. And…then I changed my mind as savings rates increased and have held pretty steady. In my experience, having the savings available to pay off my mortgage, IF I want to, really is just as freeing. And it does help a lot to see that the actual earned interest is more than the spent mortgage interest, so it is “worth it” in that sense too.

[mae0111]

I didn't read all of the comments carefully, so I'm sorry if this was mentioned already...

Many mortgage companies have a free program where you can pay 1/2 of a monthly payment biweekly. At the end of the year, you've made one extra payment, but it gets applied 100% to the principal. You could do this and pay down the mortgage a bit, and still keep your cash in savings while earning interest. I don't know if you're already doing this, but if not, maybe check it out? With a $140K mortgage, an extra principal payment will definitely make a dent!