# Accelerated mortgage payments (and the GRS amortization calculator)

What if you’ve reviewed the compromises required to pay your mortgage early and the idea still appeals to you? You might pay a bank to set up a bi-weekly payment plan or a money merge account. But you can do just as well by taking mortgage acceleration into your own hands. Here are three options I’ve considered:

• Rather than pay my mortgage, I could deposit my money into a high-yield savings account earning roughly 5% interest. Though this earns the lowest possible rate of return on my money, it gives me the greatest flexibility. I could withdraw the money to pay down the mortgage at any time. Or I could save for other goals.
• On the other hand, I might make extra payments on my mortgage each month. This would effectively earn me a guaranteed rate of return equal to my mortgage interest rate (6.25%). This would also help me spend less on interest. Doing this, however, ties up my money, making it difficult to access if I decide I want it for something else.
• My third choice is to invest the money in low-cost index funds. This would, in theory, provide the highest possible rate of return for my money, but as with any stock market investment, there’s an element of risk. If my goal is to pay off my mortgage, a bear market is going to make me sweat.

Kris and I will decide what we intend to do by early next year. Initially, I thought we’d make payments directly on the loan, but after previous discussions here at Get Rich Slowly, I’m leaning toward placing the money in a high-yield savings account until we know better what our long-term financial goals are.

## HELOC Payment Calculator for Excel

Meanwhile, I was curious: How long would it take to pay off my mortgage using the HELOC I already have? Would using the HELOC actually save time over applying the payment directly to the mortgage itself? To play with the numbers, I developed a mortgage amortization spreadsheet. (This spreadsheet doesn’t account for inflation — that’s beyond my Excel acumen.)

Here are the four scenarios I examined:

• Make no extra payments. If I simply continue to make my monthly mortgage payment, it will take me 324 months (27 years) to repay the loan. I will pay \$231,938.86 in interest.
• Make an extra payment every month. If I were to make extra payments of \$1750 every single month, the mortgage would be paid off in 86 months (or just over 7 years). I would pay \$52,424.73 in interest on the mortgage.
• Implement a “do-it-yourself” money merge account. If I were to take \$21,000 from my HELOC and put it toward my mortgage right now, pay the HELOC off over the course of a year, then repeat this process every September, my mortgage would be paid off in 85 months, or just over 7 years. I would pay \$47,087.76 in interest on the primary mortgage, and about \$7,264.39 in interest on the HELOC. That’s a total of \$54,352.13.
• Make lump-sum payments every year.If I were to save \$21,000 every year and then use the money to pay down the mortgage, it would be finished in 92 months (just under 8 years). I would pay \$57,838.29 in interest on the mortgage, but earn about \$3,070.13 on my savings, for a net cost of \$54,768.16.

As you can see, there’s not much difference between the three mortgage acceleration scenarios. Using the numbers I’ve chosen, they each take a little over seven years and \$50,000 to complete.

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### There are 46 comments to "Accelerated mortgage payments (and the GRS amortization calculator)".

1. Ed says 01 October 2007 at 19:27

I decided to do the biweekly payment amount on my own. I set up an account with ING electric orange (which is paying higher interest than my credit union checking) to take 50% of my mortage payment every other week.
Then on the 10th of each month, I pay 108% of my monthly mortgage payment. My acutal house payment is due on the 20th.
Over the course of 12 months I have made 13 payments, earned a higher interest rate than in my CU checking and don’t have to lift a finger.
If I was really AR (and I am close) I should do this with all my fixed monthly bills, but alas I haven’t reached that point.

2. J.D. says 01 October 2007 at 19:38

I’m getting close to that, too, Ed. The magic of setting up automatic payments for fixed monthly bills is that you can just forget about them and let things work on their own! I’ve got the gas company down — four more bills to go…

3. Brigitte says 01 October 2007 at 20:04

I’m sort of curious how you got those numbers. Do you live in a state that allows loans to be paid early, through the rule of 78’s? Did you account for any penalties there may be for paying off early?

It looks like most states only allow 30-60 days of interest (as if you were paying it off in 30-60 days), but some allow half the remaining interest and some allow the loan holder to charge the entirety of the interest on the loan as if paid at the regular contract date, no matter if it’s paid of early. Sometimes mortgaging laws are different from general loans though.

That being said, depending on the penalties, it would almost be better to use any extra money one would have put to extra mortgage payments into a high-interest savings situation and simply gain interest.

4. J.D. says 01 October 2007 at 20:19

Interesting question, Brigitte. I don’t have an equally interesting answer. I simply ran the numbers through a spreadsheet making the assumptiont that there were no penalties for prepayment. You have me curious now, though. That’s not something that Kris and I would have looked for when reading the loan docs way back when. I’ll have to go dig out my mortgage and see what it actually says about prepayments.

I do know that there’s a spot on my mortgage statement each month in which I can allocated extra money to principal, so this certainly leads me to believe that my bank allows it. It never occurred to me that they might not…

5. Alan says 01 October 2007 at 21:52

I thought you were supposed to figure your after-tax effective mortgage rate based on the interest & points you can deduct (assuming you don’t take the standard deduction). So a 6.25% mortgage for someone in the 28% tax bracket would effectively be 4.5% wouldn’t it? In which case, the 5% savings is a better investment.

6. Jeff says 02 October 2007 at 03:26

You know somebody has the anti-debt religion when they start talking about paying their house off over 7 years — and they haven’t even finished paying down their consumer debt yet. The phrase that immediately popped into my head was “too smart by half”. And from the post, I think J.D. is starting to realize this.

Saving money will do more in the short term to reduce the risks from possible job loss or health problems than paying down the mortgage. And like Alan said, when you figure in the mortgage interest deduction, saving is very competitive numbers-wise, as well.

But to use a phrase from Tim Ferris, don’t buy in too much to the deferred life plan. Paying your mortgage off in seven years sounds like a great idea, but it’s not if you’re putting off living for the next seven years. I’m pretty sure that on the day you pay off your mortgage you will not be getting your 30’s back. Make sure you reserve some of that \$21,000 a year for having fun, right now.

7. PaulD says 02 October 2007 at 03:31

” So a 6.25% mortgage for someone in the 28% tax bracket would effectively be 4.5% wouldn’t it? In which case, the 5% savings is a better investment.”

You also need to take into account the taxes on your savings account, which would reduce the return by your marginal tax bracket, unless you are saving in some type of tax advantaged account such as a 401k or IRA.

8. 144mph says 02 October 2007 at 04:20

I think this is one of those situations where the anti-debt reflex misfires.

I think you should consider refinancing your home to get some of that 100K equity out of it and invest it elsewhere.

JD, email me if you’re curious as to why I say this, and we can discuss it further. I really don’t want to go on a rant about it, but I think pre-payments are waaaaay overrated for several reasons.

9. Peter says 02 October 2007 at 04:32

If I have a mortgage at 6% and people say paying it off early is like making a guaranteed 6%, is that accounting for the intrest accruals properly?

I thought that mortgage interest was calculated differently from the interest and dividends you would get from investing the money. It seems like paying it off early would actually generate a higher return than the base APR if you calculate it based on how much mortgage interet you’re not paying.

10. Booker says 02 October 2007 at 04:37

JD, do you already have a savings account that can cover most emergencies? Unless you are saving for an immediate goal (downpayment on a bigger house, new car, etc), the 5% savings account seems like a bad option. I would do a combination of pay down debt (effectively a 6.25% return, as you stated) and invest in an index fund. If you haven’t maxed out your Roth IRA or college savings account for your child, those would give you an additional tax benefits on top of the expected return from the stock market.

11. Stephen Popick says 02 October 2007 at 05:19

Once we’re back from our honeymoon, we’re going to be paying off the mortgage with extra automatic monthly payments.

We want to pay off both positions within 10 years because that will free us up alot to raise children or work on our various entreprenurial ideas.

But we wouldn’t be paying off the mortgage if we weren’t already maxing our pretax retirement savings. We also wouldn’t be doing this if we weren’t buying stocks post-tax.

We’re helped in that we’re renting a room in our house and sending that money directly to the principal of our highest interest rate loan. We’re also helped in that we don’t have kids yet, and we’re still young and like to do inexpensive things.

12. Special Ed says 02 October 2007 at 05:26

Alan, said, “So a 6.25% mortgage for someone in the 28% tax bracket would effectively be 4.5% wouldn’t it? In which case, the 5% savings is a better investment.”

You still have to pay taxes on your 5% interest.

13. telly says 02 October 2007 at 05:39

Special Ed said, “You still have to pay taxes on your 5% interest.”

That’s the point everyone seems to be missing. Interest income is taxed like regular income so you’d likely need to earn much more to make savings in an interest bearing account better than pre-paying the mortgage (and a very low mortgage rate).

I would look into what your bank / mortgage company says about skipping payments in case of emergency. Most banks (at least in Canada) will allow you to skip mortgage payments without penalty if you’ve made substantial pre-payments in the past so we stick to the pre-payments.

14. J.D. says 02 October 2007 at 05:59

Wow. Great comments. When I started playing with the numbers yesterday and decided to post this, I didn’t realize I’d get so many useful responses. (I’m not sure why I’m surprised, though.)

To answer some questions: note that this isn’t a decision I need to make until early next year. I do still have debt, but it will be gone in the next 4-8 weeks. (Believe me, you’ll read plenty about it here at GRS.) I do have an emergency fund, but I intend to pad it before making other moves. My Roth IRA is not funded yet for 2007, but both 2007 & 2008 will be funded before I start trying to accelerate mortgage payments.

Actually, one option that I forgot to mention — and one I like — is to divide my money among several goals at once: a little mortgage reduction, a little long-term savings, and a little investing. But, as I say, I have a few months left before I need to make a decision…

15. Curtis says 02 October 2007 at 06:06

One thing I think most people forget about the “tax savings from mortgage interest” is that you really don’t get all of that. The standard deduction for married filing jointly is what, like \$9,000? You save NO taxes on the first 9000 of mortgage interest. Just on anything over the standard allowable deduction.

16. Russell Heimlich says 02 October 2007 at 06:44

If you can write out an algorithm I can write a handy dandy JavaScript version that anyone can use on the web. Looking at the Excel equations I get a little lost with things like D\$4*(D\$5/12)

17. Angie says 02 October 2007 at 07:10

Posts like this are why I read GRS every day. Thanks, JD.

18. Kurt says 02 October 2007 at 07:16

Looking through it, I would have used some of the integrated payment calculators in excel, but I suppose this works as well.

19. Matt says 02 October 2007 at 08:08

I have a couple questions that perhaps you answer in a future post (once you process all the comments . . . ):

– how does tax-deductibility of mortgage interest effect the equation?
– how could the compounding of money saved in a on-line savings account or a low-fee index fund (or portfolio thereof) impact the equation? (i.e.: if you saved the “extra” money in some savings vehicle, while enjoying the advantage of income tax deductibility, if that’s available — and _then_ paying off the mortgage in a lump sum later?)

20. FinanceAndFat says 02 October 2007 at 08:12

Thought provoking post and great comments!

I have to admit I’ve jumped on the no debt bandwagon, but I’m only getting started on getting rid of my debt so plans to pay off the house early or not are a long way off. This certainly has me thinking though. It does seem rather risky to tie up so much money in one asset before establishing several other solid sources of cash/investments.

I won’t have to decide for several years though!

21. Alan Corey says 02 October 2007 at 08:23

J.D.,

Here’s a thought. Say your mortgage is 6.25%. Basically you are taking your savings of \$21,000 a year and investing it for that amount.

But you could probably get 7-8% return in stocks/mutual fund (and a mortgage gives you some tax breaks). Plus, if you have a home repair/emergency you can sell stocks to pay it off, but you can’t take out a bigger mortgage without paying some hefty fees.

22. pauld says 02 October 2007 at 08:51

I think we can all agree that it does not make sense to pay off the mortgage until all other higher interest debts have first been paid. Many of us would agree that pre-payments don’t make sense until you have maxed out tax advantaged savings plan such as Roth IRA’s and 401k’s.
To this list I would add the following: It doesn’t make sense to pay off the mortgage early until you have saved enough so that you can buy your next car without a loan. Otherwise, you are paying off a lower interest tax advantaged home loan when you will soon be assuming a higher interest non-deductable car payment

23. Nicole says 02 October 2007 at 08:53

JD-

As much as I love Get Rich Slowly, this post raised my eyebrow quite a bit! As you know I am a financial educator and I am not so much anti – (all)debt as pro wealth building. In my opinion, you need to use leverage to your advantage. I agree with 144mph. Of course you have to go with your gut and I always teach that you have to choose between making a business decision or a what makes you comfortable. If you HATE debt, then get rid of it. But be cognizant you are losing potential long term wealth as a result.

24. Ed says 02 October 2007 at 10:23

remember that getting a tax deduction for mortgage interest is not that big of deal. You are paying \$14k in yearly interest to take \$10k off your taxes.

If you give me \$14k, I will give you \$11k, a much better deal 😉

25. tba02 says 02 October 2007 at 10:30

Interesting post JD. I’m dealing with a similar scenario.

I have 98K in savings right now. This includes my emergency fund.
I have zero debt.
I have yet to fund my IRA’s for the year, 401K is funded.
I am going to purchase land that will cost ~125,000.
The scenarios I am looking at are as follows (assuming the loan is at 7%).
20% down w/ larger monthly payments leaving more money available and greater flexibility.
20% down and paying extra payments monthly.
50% down affording some cash/investment options but lower payments.
75% down leaving minimal cash for emergency’s, much lower payments and start rebuilding the savings at a greater rate.

My salary allows for any of the above.

The long term goal is to have it paid off in 5 years or less. I’m still playing with the numbers.

I’m curious what others would do.

26. Todd says 02 October 2007 at 11:38

Nicole and 144mph, once that after-tax money in the market grows won’t you be thinking, “that new car looks nice” or “only a little of that would sure make a great home theater” and so on? It would only be a small portion of this savings! It’s a very slippery slope. 100% of mortgage prepayments reduce interest working AGAINST you.

27. pauld says 02 October 2007 at 11:43

“I’m curious what others would do.”

It is hard to give generic advice regarding this question because it depends on many things.
First, what is your tax bracket? If you are in the 28% marginal bracket, then the effective rate on a 7% loan is about 5% This is the number to beat. If the money is in a Roth IRA, you can do better with almost no risk and you can do much better, if you are willing to assume greater risk. So I would first fund your own Roth and your wife’s, if you have a wife.
Next, if you have children, and expect that they will attend college, I would put money in a 529 plan before paying down the property loan. I note that you have already maxed out your 401k.
Finally, if you can invest for the long-term, I would invest money in a diversified portfolio of stocks and bonds before paying down the mortgage. By incurring some risk, you should be able to easily beat 5.0% in the long-term and have greater liquidity, if you need it.
An additional factor you should consider is the possibility that your loan could be refinanced in the future at a rate significantly lower than 7%. Mortgage rates in the recent past have been in the low 5% range and could go back that low if you wait long enough. If this were to occur, all the above mentioned investment options become even more attractive.
I agree generally with the school of thought that if you can obtain a good rate, you should obtain the largest mortgage you can and pay it as slowly as the bank will permit. Whether this is a good option for you depends on your risk tolerance and your investmet horizon.

28. Dave Farquhar says 02 October 2007 at 14:44

I tend toward the zero-debt school of thought. I’ll tell you why.

Yes, theoretically, I should string along my mortgage and its 5.75% rate as long as possible because I can earn a lot more than that with average stocks. Theoretically I should borrow even more money since interest rates are still significantly lower than the average historical return on stocks.

But theoretically I can lose my job at the drop of a hat. In 2005, I lost two jobs due to downsizing. That’s the reality in the IT field now, and it can take 6 months to find a new job. Longer than that sometimes.

Due to my employer’s contract, theoretically my job is safe at least until next October. That’s great because I should be able to pay my house off before October. Then it doesn’t matter, because without that mortgage payment, the job I had in college would be enough to support us. I have complete freedom to change careers, take a lower-paying job that’s closer to home, become self-employed, or whatever.

I’ll turn 33 this year. Realistically, I can be debt-free by 35, if not sooner. That still leaves plenty of time to build wealth, but with less risk, since I won’t owe anybody anything. While everyone else I know is writing \$2,000 in checks every month to make car and house payments, I can be dumping the same amount into investments. The money will pile up quickly.

Having been in the situation where I had to write a check with four digits to the left of the decimal point with no idea when I’d have a regular paycheck again, I’d rather get rid of the debt. Especially with all the questions about what the economy is going to do.

If you’re absolutely certain that your job is secure for as long as you want it, great, pay your mortgage off slowly. But I’d rather pay mine off quickly and have the freedom that goes with it.

29. Sam says 02 October 2007 at 15:24

Good topic and one that we are think about as well. I have a couple of additional points that I don’t think have been addressed. If you pay off the mortgage, you have the option of self-insuring or reducing insurance, etc. Depending on where you live and how much insurance you have to pay for that flexibility could be significant. Here in Florida, I have 4 insurance policies for my home (primary home and separate carriage house), all required by the bank. If we paid off the mortgage we could drop the 2 insurance policies that cover the carriage house, self insure for that structure or some combination.

Second, I think that with debt there is a financial analysis and an emotional analysis. See Dave Ramsey and his debt snowball (which is working well for us). The financial analysis for paying of debts in order of smallest to biggest doesn’t make financial sense but it seems to work well. I think paying off the mortgage and other lower cost debt (see student loans) makes sense for some who want the emotional pay off. As an aside, I think its interesting to note that paying of the home early is second to last on Dave’s baby step list.

I think we will end up adding a 1/12 payment to our monthly mortgage payment while we work on other goals. We are maxing out our 401k, but we want to fully max out an IRA for each of us and increase our emergency fund.

30. Grover says 02 October 2007 at 17:29

pauld –
“It is hard to give generic advice regarding this question because it depends on many things.”

So true, and I guess I was just presenting the similarities of the post and the situation I am evaluating. Land loans are a bit unique as the lending scenarios are different than a conventional home loan. On average I need to have the land loan paid via balloon in 2 or 5 years (yes some 10 out there but in the majority are 2 or 5).

>First, what is your tax bracket?
– yes 28%

If you are in the 28% marginal bracket, then the effective rate on a 7% loan is about 5% This is the number to beat.
– agreed

>If the money is in a Roth IRA, you can do better with almost no risk and you can do much better, if you are willing to assume greater risk. So I would first fund your own Roth and your wife’s, if you have a wife.

– I do have a wife and yes, I plan on funding. I haven’t as of yet as we have been trying to stay as liquid as possible. I was hoping to have the option of paying cash if needed.

Next, if you have children,

– none (snip – ha! not really just funny)

-yes

>Finally, if you can invest for the long-term, I would invest money in a diversified portfolio of stocks and bonds before paying down the mortgage. By incurring some risk, you should be able to easily beat 5.0% in the long-term and have greater liquidity, if you need it.

– a great point to consider and compounding is of great value. My investment focus at this time is to spend money on land/home, add sweat equity, and create a situation where in five to seven years my land/home/water/power and via gardening, some food are paid for. That will put me at age 50. I have other investments that will become available at that time that I can leverage.

But you are right too, and those are the areas I am wrestling with, much like this post (hoping not to derail it too much).

>An additional factor you should consider is the possibility that your loan could be refinanced in the future at a rate significantly lower than 7%.

– land is a different beast, but the premise is sound. It would be in the form of a construction loan. That does require that the land loan be paid first in most cases.

>Mortgage rates in the recent past have been in the low 5% range and could go back that low if you wait long enough. If this were to occur, all the above mentioned investment options become even more attractive.

– fed screw ups not withstanding .. mumble , mumble .. 🙂

I agree generally with the school of thought that if you can obtain a good rate, you should obtain the largest mortgage you can and pay it as slowly as the bank will permit. Whether this is a good option for you depends on your risk tolerance and your investment horizon.

– I am of the same school, or similar. I hate debt with the exception of a mortgage. If I could get a 30 year conventional for land it would be a no brainer, but in this case I am going to have to play with some serious numbers to see which scenario works.

Thanks for the feedback.
This project may require I actually post to my blog with the research one of these days.

31. Dylan Ross says 02 October 2007 at 19:35

I’ve looked at the “pre-pay mortgage” vs. “add more to savings” question dozens of times for my financial planning clients. When you take the risk of possibly missing financial goals into account, it’s a very close race. In some situations, pre-paying debt wins out and other times extra savings wins out. It is really dependant on a number of other variables. Rarely is the difference extreme and sometimes results in a fair price to pay for people to feel better about having less debt or more savings. Often times a compromise involving some amount of pre-payment is the best fit.

But I don’t think this question can be answered by simply looking at interest rates, average returns, and today’s tax rates and deductions.

32. lisa says 03 October 2007 at 08:47

From someone who has paid the mortgage off: It feels great.

We agonized over this. Our situation is not typical. We have a lot of savings, no other debt, and a lump sum that we had to invest.

Everyone told us to put it into the market and to keep the tax break that a mortgage provides. Instead we paid off the mortgage and now use the monthly payment to max out the 401K limit (with the tax break it provides.)

No other investment has provided such an amazing payoff. I do not routinely smile when I think about our 401K balance or our portfolio balance. Several times a week I glow at the thought of being completely debt free.

There are a couple of side benefits as well. 1) I am much more risk tolerant with our remaining investments. 2) My preoccupation with finances and worry about the market is gone. 3) Lifestyle creep is less likely since we can’t get a bigger house or a more expensive neighborhood without getting back in the mortgage grind.

When people talk about this they discount the emotional aspect too much. What else are we earning money for but to purchase happiness and peace of mind.

33. handworn says 03 October 2007 at 10:14

I’d do the lump-sum thing. That reduces your illiquidity in case a real disaster should strike, and it’s more psychologically satisfying.

I’d just point out that you might be smarter to put the money into dividend-paying stock than a savings account. Some blue chips pay as much as 5% (banks in particular) and the dividends are taxed much lower than interest.

34. jagg says 03 October 2007 at 11:52

I have stock options vesting over the next few years with my company. Since we’re debt free and we have an emergency fund and well funded retirement and college funds, we’ll be dumping all of the \$ from the options on our mortgage as they vest.

We currently have 25 years left on our 30 year mortgage, which will be paid off when we are 62 and 60 years old. By using the stock option \$, we’ll have it paid for by the time we’re 52 and 50.

The reason we’re doing this is because we know we’d squander a lot of the money otherwise. We can still live a very nice (and fun) life (without spoiling ourselves and our kids rotten) and have complete financial freedom in our early 50s.

35. Mr. Witt says 07 October 2007 at 02:02

I have read with much interest, anything i come across with respect to the question of “should i pay extra towards my mortgage, or invest the \$?”

And i am still confused. It SEEMS straight forward – i have a fairly low interest rate 5.14%, and my investments (i’m 36, so thinking long-term) will likely do better – and have been doing MUCH better over the last 10 years.

But.

Noone seems to address what my major concern is. We are locked into a 5 year term. What happens if the interest rates jump significantly? Take an extreme (for sake of argument): in 5 years we are stuck with a mortgage of 18%.

If this happens, would i look back and think “Bleep, i wish we had paid a lump sum at our principal rather than buying more index funds!”, or would i think “Well, that sucks, but thank goodness the market is getting better returns than 18%!”

The more basic question (i think) is: if my interest rate increases, does this ALSO mean that – usually – the market return of my investments is also doing better? Or are there large periods of time (large being, say 5 years, our term) when mortgage rates are generally far greater than reasonable expectations of investment returns?

We will see if i can write a lucid comment at 2:02 AM with a belly full of turkey, stuffing, pumpkin pie, and antacid…

cheers, and thanks for the always interesting blog.

Darren

36. Josh Baltzell says 30 October 2007 at 08:04

Sorry, I know this post is not new, but have you considered shopping around for 15 year fixed loans and refinancing? I’m not positive what kind of rate you will get, but it might be worth looking in to.

37. JimmyDaGeek says 04 December 2007 at 02:23

The best way to pay off the mortgage (and possibly most nerve-wracking) is to invest in a diversified portfolio of index funds and use the appreciated value. This is a long-term solution, with questions about the tax rate of dividends and long-term capital gains in the future.

Using an ordinary high-yield savings account is not as useful as interest rates are going down, and you are probably going to pay 25-32% in taxes, further reducing your yield.

If anyone is thinking about a “do-it-yourself money merge account,” understand that:
1) The correct way to do it is to borrow just enough money per month so that depositing your salary against the outstanding balance will bring that balance to zero at some point in the month.
2) You must be careful to bunch your bill payments as much a possible so your deposited salary will keep the balance at zero for as long as possible.
3) The greater the difference between your mortgage and HELOC rates, the less the savings.
4) Contrary to every advertised product, using a HELOC gives you a very small savings. 98-99% of the savings comes from paying down the principal with excess cash, not shuffling money in and out. I have spreadsheets to prove it.

38. Jeff says 04 December 2007 at 13:26

I added some of the feature of my schedule, such as total extra payments and total interest.

Using my real life mortgage:
125,000 @ 5.375% PI=703.32

add \$200 a month to principal(total 903.32}
242 monthly payments
\$71,462.00 total interest paid
\$42,660.00 xtra paid
or
222 monthly payments
\$73,272 total interest paid
\$43,200 xtra paid
This does not take into account putting \$200 a month into an interest bearing account.

There is a greater difference than lead on to. First the monthly way you pay \$600 LESS in interest. Pretty even for all intents. But using the yearly 20 less payments made which using just PI equals 20×703=\$14,060.00 in savings over the course of the loan, a significant amount. This discreptancy would be greater with a interest bearing account.

There are other things to take into account such as tax returns as there is less of a deduction with lower interest paid if you use a 1040A….

Also it takes discipline to save the money and not use it….

Jeff

39. Toni says 28 January 2008 at 11:54

Hello,

I am a divorced woman, 58 years old and bought a condo in January 2007. My loan was for \$375,000 with a 30 year fix rate mortgage at 5.75%. I want to pay the condo off in ten years maximum so that I am not burdened by the mortgage payment when I retire. I would really like to retire at age 68. Please advise.

40. JimmyDaGeek says 28 January 2008 at 20:44

Hi Toni #41,
According to my amortization schedule, your monthly mortgage payment, excluding your taxes, insurance and condo fee payments, is \$2,188.40. Your principal will have been brought down to about 370,175, after making 12 payments.

To pay this amount off in 10 years (120 payments) or less, you need to make extra principal payments of at least \$1880 a month, starting with February’s payment.

I hope this number doesn’t faze you. Mortgage payoff programs create an illusion that somehow more money can be gotten from your income to pay your mortgage. People get motivated to adjust their buying habits when they can see how each dollar spent now affects their future payoff.

41. Pippin says 15 February 2008 at 03:28

I love, love, love, your mortgage amortization spreadsheet. I’d been bashing around on an online calculator and coming up with really rubbish results, which were OK for me, but not making sense to my partner. Didn’t pay so much attention when I saw this in the original blog post, but having found it via a google, reminded just how important grs is!

You rule, JD!

42. Cyndee says 08 March 2008 at 22:02

I too want to pay off my mortgage early. Using a calculator on a site, I figured that mine could be paid off in 4 years, 2 months by paying an extra \$1100.00 per month.

My husband and I want this debt behind us so we can put aside a large nest egg outside of our retirement accounts.

Not owing anyone anything is the peace of mind I want. Being debt free (and I mean owing no one) will give us options. It will be nice to have options at our age (49 & 52).

Someone asked me why I was doing it because I would lose the tax deduction. My answer to them was this “If I’m not making any payments, I get to keep all the money, to heck with a tax deduction!”.

Just my 2 cents.

43. Bob Garcia says 10 March 2008 at 07:40

Pippin,
Where can I find JD’s Spreadsheet?
Bob43

44. Don Kircher says 21 March 2008 at 19:46

Option three misses a critical function
of the idea. By putting your paycheck into
the heloc you might pay that 21000 balance
down to zero in six or eight months allowing
a second payment in the year. Then you use your
credit cards and heloc to pay all your living
expenses

The most advantageous feature of option three
is also overlooked. In an emergency, you
can pull the money back out for use as you
can in the savings account scenario. Regarding option four, would you dump every
last penny of savings into the mortgage
leaving you nothing for an emergency?

We’ve been doing the program now for a year.
In the last seven months we’ve increased our
equity by 18,000 dollars with another 10,000
going in at the end of next month. Our budget can comfortably handle 10,000 dollars
every four months. Our projected payoff will be in three and a half years after twelve
ten thousand dollar payments. The balance will be paid by the compounding interest in the primary mortgage itself. The principal
payment jumps about fifty bucks with each
10 grand payment.

The last key to our setup is wise use
of credit cards. We purchase EVERYTHING
on the credit card with a close eye on
the grace period while the payment remains
in the HELOC keeping the interest down.
The credit card is paid on the due date from
the HELOC electronically.
This effectively cuts us a 23 day interest
free loan which pays us 6% in HELOC interest
we don’t have to pay.

The final piece to the puzzle is respecting
your limits. Harj Gill recommends a heloc
no larger than your monthly net take home
pay so you cannot bury yourself. We got set
up through Freedom Financial International
and their working do not exceed number is
two and one half times your monthly take
home pay. If you exceed that number the brakes are put on the budget until you
are beneath the threshold.

It cost me five grand to learn that and I’m
sharing it with you for free. Sure, we coulda done it cheaper. But when we got into it there wasn’t as much out there as
there is now. We needed someone to hold
our hand. Now we don’t. Had I known this
twenty years ago I would be retired today
with several (four or five) rental properties all paid for free and clear using
nothing but this technique.

Knowing what I know now I would use Harj Gill’s
software as training wheels till I gained some
confidence in the system.

I put his link up for you. I won’t make a dime
from the referral. Every high school kid in the
country should be aware of this. Then they can
use it or not as they choose

45. Mike says 09 December 2008 at 13:06

Cyndee Post 44 is right.

Paying the minimum on a mortgage solely for the ‘benefit’ of a tax deduction is idiotic.

Wouldn’t you rather have your all your money in the first place? Paying \$1,000 to get a \$100 refund is not the smart thing to do.

46. Joe Smith says 18 December 2008 at 12:21

if you want to cut down on your mortgage,simply make 1 addition payment each year EQUAL TO YOUR MONTHLY AMOUNT OF your mortgage to THE PRINCIPAL< NOT AN EXTRA MORTGAGE PAYMENT! BE SURE THE PAYMENT GOES ON THE PRINCIPAL! this will cut down a 30year loan to 17years! this way,if you can’t afford it,you don’t have to do it!
bi-weekly is the same type of thing,its more periods of payment,but the same monthly mortage amount as a 30 year mortgage,and it comes out to 17 years! the frequency of payments doubled,so the length of time is cut about in half!
the other question i saw was about the rule of 78,also called the sum of digits of the year! if you add up 1+2+3+etc.+12=78! that’s where the 78 comes from! what this assumes is the depreciation is more in the beginning of the life of item purchased(new)and less and less as it gets older and becomes worth next to nothing! like a car.
the amount of interest is the same as simple interestloan if you pay it every month,and even if you pay it off a little early, the problem is you pay ALL the Interest First! then you pay on the principal!
so if you pay on the car for 2 years,you still owe as much as it cost when it was new! if you are in an accident,the insurance company isn’t going to pay the purchase price since it is 2 years old,and you end up eating that difference! most people end up rolling it over(making it part of the next car loan they get)now,the payments on the next car are even higher! that is the problem with Rule of 78 loans! it is illegal in 19 states in the us,and is sometimes used when selling mobile homes! the dealer gets a kick-back when you use this type loan they get you,since the lender is getting all the interest upfront!about \$500 or so extra profit for the dealer! that’s why you can get a rule of 78 loan,but not a simple interest loan- if your credit has a few dings(problems) in it! welcome to america!
the big 3 want us to bail them out,but they won’t give you a buy on a car!! the average american car costs about \$20,000 to build,and 10% of that cost is labor! i bet autoworkers average over \$50/hour,not including benefits! and work 1,000 hours of overtime a year at time & half! that’s \$125,000 gross! maybe more,maybe less! i feel sorry for them,don’t you?? while the average american makes \$45,000/year,if they are lucky!