Early Mortgage Payoff, Calculation Methods, and Related Issues

143999143999 Tellin' yanot askin' ya, not pleadin' with yaRegistered User regular
So! Looking to buy a house. I have an idea of what I want to do, and I know that the idea itself is sound, but I'd really like to find the right formula that will spit out the payment schedules that I want so that I can have a good idea of what it means on a month to month basis when I'm looking at price tags.

What I'm looking at is basically the old pay it off early scenario. I want to get, say, a 15-year fixed, and throw money at it above and beyond the minimum payment until I have it paid off. My target payoff date is 5 years from closing.

I'm a little skittish about just looking for a 5-year mortgage, since A) those seem to be more rare than even a 10-year loan, and B) the minimum monthly payments for a 5-year mortgage, given the same rates as a 10-year loan for a house of the same cost (depending on the final cost of the chosen home, of course), miiiiight be pushing it if (when) something goes sideways.

This would be easy enough to calculate if it was a straight 5-year loan, sure, but I don't know how to calculate what effectively would be something like (for a 10-year loan):
  • X outstanding balance
  • Y rate
  • Z payment amount
  • 120 payments over 120 months, spread over principal/interest at an ascending/descending rate respectively
  • Now, solve for Z using 120 payments over 60 months, with alternating payments going toward principal reduction, and known good estimates for X and Y

I know in practice that getting a loan holder to properly apply extra payments to principal is a YMMV thing (or MMMV, I guess), but assuming that my lender applies payments as instructed, is it just a matter of cutting the payment number in half? Surely applying the extra payment amount to only the principal makes the calculation more complex than that, right?

This is all very preliminary on my part. I talked to a couple of lenders about six months ago, but that fell through due to an unexpected financial downturn. I recently managed to definitively put a stake in that issue, and I'd like to at least begin to look around for something better than my current housing situation. I really want to have as many of my ducks in a row as possible before I start looking in earnest, which to me means running some numbers and figuring out what I can comfortably afford before I start talking to people who want to sell me either a piece of real estate or a financial product that enables the purchase of same.

Anybody have a reliable formula for this? Or know of a preexisting calculator that will give me some reliable results?

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Posts

  • DevoutlyApatheticDevoutlyApathetic Registered User regular
    You're going to want a fancy excel sheet for this sort of stuff.

    http://www.vertex42.com/Calculators/mortgage-calculators.html

    Looked like it might have some winners.

  • schussschuss Registered User regular
    I'd definitely suggest talking to a knowledgeable mortgage broker, as they can not only help you on the product side but which lenders are most advantageous for certain terms. Given current interest rates, there's little reason to go beyond a 15 year as the rates are currently around 2.8%, which is beneath normal expected returns if you're investing.

    tinwhiskers
  • 143999143999 Tellin' ya not askin' ya, not pleadin' with yaRegistered User regular
    The very first one at vertex42 looks like almost what I need.

    It doesn't seem to have an option for...okay, how to describe this. There's a PMI variable in it, in case the user doesn't have 20% to put down. PMI only has to be carried for the duration that the purchaser doesn't have 20% equity in the home, right? So, if I bought a $250k home and I only had $25k to put down after closing costs, etc., I would need PMI until I had $50k equity, right? Or am I wrong and PMI has to be carried for the duration?

    At any rate, the one that vertex42 seems to say is their most full-featured option has an option to give it the loan amount and the home value (which would tell it the down payment by subtracting B from A), and it gives me a complete amortization schedule, so it knows how much I'm putting into principal monthly, but it doesn't seem to cut PMI out of the equation once equity reaches 20%.

    Good enough for estimates, though. And the notes in the calculator helpfully reminded me to make sure that my future lender doesn't apply penalties to my loan for principal prepayment, or to account for same if I can't get around it.

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  • DevoutlyApatheticDevoutlyApathetic Registered User regular
    schuss wrote: »
    I'd definitely suggest talking to a knowledgeable mortgage broker, as they can not only help you on the product side but which lenders are most advantageous for certain terms. Given current interest rates, there's little reason to go beyond a 15 year as the rates are currently around 2.8%, which is beneath normal expected returns if you're investing.

    Yea, like I'm looking at just above 3.5% for a 30 year and I'm questioning if pushing prepayment makes much sense rather than just investing that cash.
    143999 wrote: »
    It doesn't seem to have an option for...okay, how to describe this. There's a PMI variable in it, in case the user doesn't have 20% to put down. PMI only has to be carried for the duration that the purchaser doesn't have 20% equity in the home, right? So, if I bought a $250k home and I only had $25k to put down after closing costs, etc., I would need PMI until I had $50k equity, right? Or am I wrong and PMI has to be carried for the duration?

    At any rate, the one that vertex42 seems to say is their most full-featured option has an option to give it the loan amount and the home value (which would tell it the down payment by subtracting B from A), and it gives me a complete amortization schedule, so it knows how much I'm putting into principal monthly, but it doesn't seem to cut PMI out of the equation once equity reaches 20%.

    Really depends on the type of loan. FHA loans don't ever ditch it IIRC but generally yes, once you hit 20% equity they drop the PMI requirement.

    schussFarangu
  • DjeetDjeet Registered User regular
    They don't cut the payment, they do not re-amortize on the fly based on additional principal paid. You may be able to have them re-amortize (called recasting or re-amortization), but there will be a fee, and if you want them to do it again later, there will be another fee each time.


    Let's say I owe $150K and my payment is $1K/mo with interest/principal ratio being 77%/23%.

    If I cut them a check for the remaining principal I would very likely still get the next bill for $1K. Though if I paid it it would get refunded; this might take a few months to work out. Better would be for me to contact them and request a payoff amount and write a check to that.

    A payoff amount - where they will say if you pay X amount by such-and-such date then you're free and clear.

    But if you're doing this just by monthly payments you'll have to ask for re-amortization (money$ each time) or just accelerate payments and make sure they go to principal. Your payments remain the same, but you need pay fewer of them. Once you've paid it all down you don't have to make the fixed payment, though in practice, unless you requested a payoff amount and wrote to that, then you'll make another payment while they get their shit together and then get a refund.

  • DeShadowCDeShadowC Registered User regular
    If you're expecting to pay it off within 5 years, I'd recommend going with a 5/1 ARM.

  • The Crowing OneThe Crowing One Registered User regular
    Don't ever take an ARM. Ever. If you want to pay off do a 30-year with a 30-yr payment. Anything able goes with a written statement prior toward primary balance.

    That said, just pay off until you hit minimum for mortgage tax deduction. Floating a small loan for tax benefit is the game.

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    bowen
  • FaranguFarangu I am a beardy man With a beardy planRegistered User regular
    We're really just now leaving the time when that plan actually wouldn't have been too bad an idea, actually. The interest indices have been low enough that even in the adjustable period, most people's rates were as low as they could go. Rates are starting to rise now, though. Source: about half of my day is spent verifying that the ARM loans we service are calculating interest correctly

    Having extra funds applied to principal outside of your monthly payments should be pretty painless, and most competent servicers can either get it right or make it right. However @Djeet is right though in that your monthly minimum payment will not change in most circumstances. There are a few loan types that are exceptions but they are typically more hassle then they're worth unless you have a single digit percentile chance of having finances get hit enough to impact repayment throughout the life of the loan.

    The other thing of note for your plan is that some loans have a prepayment penalty, where if you pay off the loan within the first X years of it, you pay a percentage of the balance as a penalty. Usually X is around three years, but that's close enough to your target to be something worth mentioning.

    Good luck house hunting!

  • DeShadowCDeShadowC Registered User regular
    Don't ever take an ARM. Ever. If you want to pay off do a 30-year with a 30-yr payment. Anything able goes with a written statement prior toward primary balance.

    That said, just pay off until you hit minimum for mortgage tax deduction. Floating a small loan for tax benefit is the game.

    The OP is planning on paying it off in 5 years, but wants a 30 year loan in case he isn't able to make the larger payments every month. In that scenario your best savings option would be a 5/1 ARM.

  • DjeetDjeet Registered User regular
    The concern with an ARM is should you have a big change in net cash flow to the negative (be it reduced income or higher expenses) you may be subject to adjustments in the index rate and you're not in a good position to refinance. So yes, if you are sure to be able to pay off in 5 years it's great, but things can change in 5 years.

  • The Crowing OneThe Crowing One Registered User regular
    DeShadowC wrote: »
    Don't ever take an ARM. Ever. If you want to pay off do a 30-year with a 30-yr payment. Anything able goes with a written statement prior toward primary balance.

    That said, just pay off until you hit minimum for mortgage tax deduction. Floating a small loan for tax benefit is the game.

    The OP is planning on paying it off in 5 years, but wants a 30 year loan in case he isn't able to make the larger payments every month. In that scenario your best savings option would be a 5/1 ARM.

    And I'm just saying, as a professional, this is risky. Not "aww shucks" risky but "life is ruined" risky.

    If you want a quick payoff take a 30 without pre-payment and pay down principle. Makes far more sense and if you pay principle down the interest rate matters a lot less for total payoff.

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    DaenrisFarangu
  • bowenbowen How you doin'? Registered User regular
    edited October 2016
    5/1 would save maybe a few thousand in interest too. The gain is minuscule compared to the risk.

    But then again, if you lose your job, that savings goes away, potentially, since now the APR changes yearly.

    If you're in a position to pay it off in 5 years, what's a few grand for the peace of mind?

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
  • schussschuss Registered User regular
    If not 30, a 20 would get you a slightly lower interest rate, but agreed with Crowing One. Especially with rate rises imminent, lock in that low rate.

    bowenDaenris
  • The Crowing OneThe Crowing One Registered User regular
    bowen wrote: »
    If you're in a position to pay it off in 5 years, what's a few grand for the peace of mind?

    More the point, what is five years if you can purchase outright? Why get a mortgage at all?

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    bowen
  • JasconiusJasconius sword criminal mad onlineRegistered User regular
    not speaking in dissent, but just providing context, three years ago when I bought my house people were also saying "lock in now they're going up soon"

    interest rates may indeed being going up soon but it likely wont be much and it basically just takes one bad week on wall street to send the rate hikers back into their cave

    so in short, don't feel rushed into something you're not comfortable with by these greater economic forces

  • DevoutlyApatheticDevoutlyApathetic Registered User regular
    Jasconius wrote: »
    not speaking in dissent, but just providing context, three years ago when I bought my house people were also saying "lock in now they're going up soon"

    interest rates may indeed being going up soon but it likely wont be much and it basically just takes one bad week on wall street to send the rate hikers back into their cave

    so in short, don't feel rushed into something you're not comfortable with by these greater economic forces

    There are two time tables here. One is the "I'm thinking of buying a house" phase where maybe you're looking for a realtor. Yes, here you'd generally be better off doing that now rather than a year or two from now as we're near historic lows right now but I wouldn't buy a house right now I wouldn't buy at the higher interest rate. The other is "I have an offer accepted on a house and looking for financing" where, you wanted to lock like three weeks ago. Rates are generally upwards right now but we are back into the lull of waiting for some big news and no Fed meeting until December to tamp down on market speculation. I'd probably say lock now but if anybody actually knew they would be making much more money elsewhere.

  • The Crowing OneThe Crowing One Registered User regular
    I have to really advise against the kind of mentality @Jasconius puts forth.

    Interest rates have been kept low intentionally by the Fed. And the only people concerned about that are those who make money off interest (i.e. those who don't work themselves).

    An ARM is never a good idea. Ever. We're one of the few nations where fixed rate loans are a thing, because they are better for homeowners than lenders.

    Unless you can afford your payment jumping to a 8+% rate, don't even think about it.

    You're better off taking a fixed rate 30 year and paying down principle without a pre-payment penalty than otherwise. Hell, if you want to minimize interest and think you can pay higher each month do a fixed rate 15 year.

    We all think we can afford huge payments until we can't. Better to give yourself a way out than to be trapped.

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    schuss
  • JasconiusJasconius sword criminal mad onlineRegistered User regular
    i wasnt advocating for an ARM

    i was just saying don't rush buying a house because rates

  • The Crowing OneThe Crowing One Registered User regular
    Actually, I'd rush to buy if one can because rates are going to go up. Hence the idea of fixing a rate at 6% instead of the 8%+ that will come soon.

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