Shortening a loan

[Glowpun]

I have a 10 year loan on a house. In order to reduce the life of the loan I am making 3 extra payments per year on the principal. However, will I need to also include the interest and impounds or will paying only the principal be enough?

 

[Deuce]

A lot of home loans or car loans have penalties for paying early. (they want that interest!)

So, uhh, read the loan paperwork?

 

[beefheart]

I have a 10 year loan on a house. In order to reduce the life of the loan I am making 3 extra payments per year on the principal. However, will I need to also include the interest and impounds or will paying only the principal be enough?

As you pay more principal, the interest amount will go down. I just pay extra priciple on each monthly mortgage payment, but if you make extra principal payments only, they will adjust the amount of interest on what is owed each month.

 

[Winchester]

I have a 10 year loan on a house. In order to reduce the life of the loan I am making 3 extra payments per year on the principal. However, will I need to also include the interest and impounds or will paying only the principal be enough?

Log into your loan and see how the extra payments are being posted. I've been including an extra $1,100/mo with the regular payment for the last 3.5 years. Mine just reduces the principal and decreases the future interest payments.

 

[poweRob]

As you pay more principal, the interest amount will go down. I just pay extra priciple on each monthly mortgage payment, but if you make extra principal payments only, they will adjust the amount of interest on what is owed each month.

So increasing payment frequencies is less preferable to just making larger monthly payments?

I ask because I had heard increasing payment frequencies on credit card debt does really well to paying down that kind of debt.

 

[cabse5]

So increasing payment frequencies is less preferable to just making larger monthly payments?

I ask because I had heard increasing payment frequencies on credit card debt does really well to paying down that kind of debt.

Whichever brings down the principal the fastest. If you make more payments than are required, the principal goes down faster than the loan predicted. Hence, interest would be less than predicted. Interest will always be charged on a remaining principal balance but only charged when the payment is due.

 

[beefheart]

So increasing payment frequencies is less preferable to just making larger monthly payments?

I ask because I had heard increasing payment frequencies on credit card debt does really well to paying down that kind of debt.

Well, my mortgage only lets me pay ahead 2 mo. So, Ido my monthly, and add about 3X to principle. Next statement reflects the interest on the new lower payoff rate. I'm paying off quicker, but I have less interest I can write off at end of year..

 

[Glowpun]

Whichever brings down the principal the fastest. If you make more payments than are required, the principal goes down faster than the loan predicted. Hence, interest would be less than predicted. Interest will always be charged on a remaining principal balance but only charged when the payment is due.

But will this reduce the life of the loan i.e., instead of a 10 year loan will the life time of the loan be decreased? I have not seen the monthly loan amount (P&I) decreased. The maturity date stays the same even though I make 3 extra payments a year.

 

[cabse5]

But will this reduce the life of the loan i.e., instead of a 10 year loan will the life time of Interest the loan be decreased? I have not seen the monthly loan amount (P&I) decreased. The maturity date stays the same even though I make 3 extra payments a year.

The loan originator has maintained the same amount of monthly payments even though you have made extra principal reducing payments to get as much interest as possible from you. When the loan is recalculated by the originator as you've mentioned, you will have a lower monthly payment which consists of less principal and consequently less interest. Don't fall for the treat of having a lower monthly payment of principal and interest resulting from your overpayment of principal because you will more than make the savings up with the misery of paying the extra accumulated amount of interest. Interest payments are what 'kills' the one paying off the mortgage. Even if you don't have the option of having the originator retain the ORIGINAL monthly payment amount , keep overpaying - keep making principal reducing payments.

There may be language in your loan contract to limit the amount or number of principal reducing payments. If there isn't this language, keep making principal reducing payments which will eventually payoff all the principal. Everyone always pays off the entire principal, the amount of interest you pay to satisfy the principal is up to you No interest can be charged on a principal balance of zero.

 

[cabse5]

When the principal balance is zero, whenever that is, the loan is completed. If you pay off the loan in a hurried fashion, the loan originator may not be happy to do business with you again. It builds up credit, though.

 

[Lord Tammerlain]

I have a 10 year loan on a house. In order to reduce the life of the loan I am making 3 extra payments per year on the principal. However, will I need to also include the interest and impounds or will paying only the principal be enough?

Depending on your particular loan

In most cases interest is charged on a per day basis, meaning the cost of the loan goes up each and every business day. Then when you make your payment it drops by the amount of your payment, going up again every day by the interest charge. So your extra payments will drop the principle and the interest at the same time

Now depending on your loan. With 3 extra payments (assuming monthly) you should be dropping the time of payment by at least 25 % so instead of a 10 year loan it should drop to about 7 years. The bank may not reflect this on the payment schedule and you might need to contact your bank representative about it. Also check to see what your prepayment allowance is. For Canada typically 20% is allowed for the term of the loan with out getting a penalty.


Now some loans are of a fixed length but offer a variable payment, if in this case your extra payments will not drop the end date, but drop the monthly payment required. These are some scenario's that are offered in Canada so may not be applicable to the US