Paying Down Loan Quicker

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Paying Down Loan Quicker

Jonathan Polacek
Charleston, SC · Member since 2020 · 8 posts · 2 votes

Hello All!

I'm preparing to buy my first house. I will buy as a primary residence with either a 15 or 30 YR conventional loan and plan to rent it after two years of enjoying it and making it "tenant proof". After reading some of Brandon Turner's books, I plan to use the tips i've learned.  

I'm hoping this post can help other newbs, like myself, AFTER I've received confirmation from the pros that my math is correct and I'm implementing the learned tips correctly. This tip relates to paying off your loan quicker.

For example, I'll say that I can COMFORTABLY afford a $2,000 mortgage payment each month. I don't want to choose a home that gives me this initially because I want to pay it off quicker. So instead...

I choose a 15 YR conventional loan on a home that brings me a $1,500 mortgage payment each month. How can I pay it off in 10 YRs?

That would be a 33% decrease in time, adding 33% to my payment. Rather than simply adding 33% to my $1,500 payment (= $1,995) and making 12 payments each year, I can lower my monthly payment by paying bi-monthly (half my monthly payment every two weeks). This will give me 13 full, monthly payments, which will lower my monthly payment by dividing the yearly total by 13, rather than 12.

52 weeks in a year = 26 half payments = 13 full payments.

Here's the math:

1,500 X 12 = 18,000 (original yearly total); 18,000 X .33 = 5,940 --> $23,940 per year to pay off in 10 YRs.

 23,940 ÷ 13 = 1,841.54 --> 1,841.54 ÷ 2 = $920.77 bi-monthly payment  

I'll check my math...

920.77 X 26 = 23,940.02 *overage due to rounding.

Want to pay it off even faster? Another tip I got from Mr. Turner's books - get an extra payment in each year by dividing your monthly payment by total number of payments in a year and adding that amount to each payment. It should look like this.

1841.54 ÷ 26 = $70.83 --> 920.77 + 70.83 = $991.60 <-- This is my new bi-monthly payment and I am still under the $2000 per month mortgage payment that I know I can comfortably afford. How wonderful!

Anything i'm missing, pros? Any discrepancies? This is a simple and an incredible way to save THOUSANDS over the life of the loan. It blew my mind when I did the math to figure how much I'd save versus paying the given monthly mortgage over the full life of the loan.

Is this helpful? I am new to Bigger Pockets and want to be active. I am lacking in experience (not for long!), but I'm pretty good with numbers, so this is where my mind went. Thank you all for your helpful posts! I've really enjoyed the ones i've read.

Random info: I just learned that bi-monthly and bi-weekly can mean the same thing due to the pre-fix "bi" being able to mean EITHER "occurring twice in" OR "occurring every two". That's silly.:)

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Mike McCarthy
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
6y

I agree with @Red Smith. Unless you’re saving 0.5% or more on a 15 year loan, I wouldn’t consider it. You can always pay down a 30yr loan faster, but you can’t extend a 15yr.

Paying down your mortgage is great, and many people can save money for retirement by doing that. BUT, have you considered better use of that money? You’re on a RE forum, so my guess is yes.

There’s nowhere else that you can get money at 3.5%. Unless your only goal is to pay off your house, I would keep that cash and put it into some other investment. Whether it’s a simple index fund (7% per year), save up for another rental property, etc. In my opinion, there’s pretty much no reason you should pay down your mortgage faster - unless maybe you’re nearing retirement age.

Just something to consider!

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  • Red Smith
    Rental Property Investor · Green Bay · Member since 2020 · 30 posts · 15 votes
    6y

    I can give you numbers off my excel sheet that gives you a different strategy, but you would need to include the price of the home and expected interest rate for a 30 year, no reason to obligate yourself to a 15-year term when you can pay off principal with extra payments

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  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    6y

    I agree with @Red Smith. Unless you’re saving 0.5% or more on a 15 year loan, I wouldn’t consider it. You can always pay down a 30yr loan faster, but you can’t extend a 15yr.

    Paying down your mortgage is great, and many people can save money for retirement by doing that. BUT, have you considered better use of that money? You’re on a RE forum, so my guess is yes.

    There’s nowhere else that you can get money at 3.5%. Unless your only goal is to pay off your house, I would keep that cash and put it into some other investment. Whether it’s a simple index fund (7% per year), save up for another rental property, etc. In my opinion, there’s pretty much no reason you should pay down your mortgage faster - unless maybe you’re nearing retirement age.

    Just something to consider!

    1Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Jonathan Polacek

    Well, in this market it’s better to get the 30yr and pay it off how ever you like. In case anything unforeseen happens, you can always fall back to the 30yr payment.

    The math doesn’t work that way because of amortization... the aspect you are looking doesn’t scale linearly. Get yourself an amortization table.

    “Bi” usually doesn’t quite mean that way... bi-monthly is every two months. Semi-monthly is very half month... but semi-monthly isn’t the same as biweekly...

    Does this answer your question (not sure I am entirely sure what you were asking)? Good luck.

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  • Richie Thomas
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    6y

    @Jonathan Polacek, I'd agree with the above advice to get a 30-year instead of a shorter term. The only reason I might advocate for paying off the loan more quickly than the minimum, is if your monthly payment included private mortgage insurance, AND paying off that PMI early would give you a much better rate of return than an index fund. The definition of "much better rate of return" is different for everyone of course, but that's really the only exception I can think of to paying the minimum on a 30-year note using the property's cash flow, and deploying the difference toward purchasing other properties and scaling your business.

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  • Jonathan Polacek
    OP
    Charleston, SC · Member since 2020 · 8 posts · 2 votes
    6y

    @Red Smith Thank you for your reply and offer to help! I can reach out to you for excel help when I have a specific property in mind. I certainly plan to start my own excel work, as well. I definitely understand your point; paying off a 30 yr quicker, if I'd like, while giving myself time to fall back on. Otherwise, using that money for other investments that have a higher return than my mortgage interest rate. Thank you, @Mike McCarthy, for that input. It makes total sense.

    Again, I'm new to this and am, simply, trying to be active on the threads and hope to spark conversation and learn more. Other than that, I simply wanted to offer a tip I learned for paying down a loan quicker to anyone who may be interested in that for one reason or another. 

     @David M. I realize I wasn't clear on what my question is, I apologize. In fact, you answered it by noting that the math doesn't work out that way due to amortization. I wanted to make sure that I wasn't offering false information to anyone who wouldn't know better. Thank you for your help and advice! I got myself a table.

    Thank you, @Richie Thomas. I'm with you on paying off the PMI if i'm unable to put 20% down. But now I'm trying to figure out if I shouldn't go with a conventional loan so I can split my total downpayment money available (30k) between multiple properties right out of the gate. My low income should make me eligible for an FHA. However, I have great credit and no debt. There are so many ways to acquire property which excites me because I know that I've started on a lifelong learning adventure in the world of real estate. Thank you, again, all and take care!

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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Jonathan Polacek

    Okay great.

    You also just commented about low income and FHA. FHA as I recall doesn't have an income limit. "New buyers" tend to have to use it because of the lower down payment requirement and more so because they have poorer credit scores. The mortgage insurance from the Government is a better rate than PMI when you have a poor credit score. If you have a high credit score, PMI should be cheaper and you should get a conventional loan.

    Also, another important distinction is that mortgage insurance never comes off of a Gov't loan. So, if you get the conventional loan, you can get the PMI once you get back to 20% down by making your payments. Its a trade-off.

    Also, don't forget that FHA loans require owner-occupation (which is fine since you say you are buying your first property as your primary residence). Conventional loans for investment properties, a property you don't live in, are certainly available but they just have a slightly higher interest rate and generally require 20% down (25% is the best break in interest rate normally).

    I know your post is asking about calculating paying down loans faster.  But, just be cognizant of the various features of your loan products.

    Good luck.

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  • Jonathan Polacek
    OP
    Charleston, SC · Member since 2020 · 8 posts · 2 votes
    6y

    @David M. Absolutely. Will Do. Thank you, again! I really appreciate your time and information. Have a wonderful day and take care. 

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    Biweekly means every two weeks, bimonthly is twice a month.  If you do the first, that is 26 payments per year vs 24 on the latter....at least where I am.

    You can look at online mortgage calculators and they will show you the savings by paying down your mortgage early and you can play with the numbers there.

    I would get the 30 year mortgage over the 15 year one.  Your plan is to buy another house in a few years, so you need to save for a down payment for that.  The 30 year term will let you add to your payments, but give you lower payments.  You also need to check the terms of the mortgage to see he much extra you are allowed to do.  For example with mine I can do 10% of the original amount each year and double the payments; any thing more and I pay a penalty.

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  • Jonathan Polacek
    OP
    Charleston, SC · Member since 2020 · 8 posts · 2 votes
    6y

    @Theresa Harris Thanks so much for responding. I'll definitely take my time and a close look at these details when choosing a loan and I've been convinced that the 30 YR is the way to go. 

     Honestly, I can't tell you all enough how excited I am to have found this group of wonderful people! I was recently talking to a friend of mine about this stuff and I watched her eyes glaze over and become a couple of doughnut wholes in her head. Hahaha i'll save my questions and comments for BiggerPockets!

    Take care All,

    JP

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