Disadvantges to paying mortgage early?

[Supa Dexta]

Besides not having the money for other investments or something what would be the issues in getting a 25 or 30 yr, over a lower 20 year or so?

This is with the intent to pay early, say one planned to pay off in 10 years or something no matter the term, does the initial longer term affect anything else?

Or would it be good to have a bit more cushion of a lower monthly payment should something happen? You'd only have to ensure you put the extra towards the mortgage and not spend it on other things, where as a higher monthly payment forces you to allocate the money accordingly.

:dunno:

[kaput]

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[masoncgy]

Longer amortization periods keep the payments down, but it also raises the total amount of interest paid unless you are diligent in paying off portions of the principle every year, based on your prepayment terms.

Most closed 5 year terms allow you to pay up to 15% of the principle per year without penalty. If your plan is to pay off the mortgage in a 10 year period while using longer amortization periods to keep the monthly obligations down, you just have to make sure you are banking away money to make that contribution each year.

If you're already someone who saves their money, this is a good option. If you're a mindless consumer, you won't do anything other than pay the bank a ton of extra interest.

[Mibz]

Yeah, we went with a longer amortization despite qualifying for a lower one simply so we have that fallback. We didn't see any reason not to when we can effectively pay the entire mortgage off in 5 years penalty free if we had the funds.

[scary_perry]

If you earn lots of commissions the 30 year makes the most sense. Make sure you do 15% per year as often as you can.

If you ever have lean months/year the payments won't cripple your cash flow.

[quazimoto]

Most wise financial planners will tell you this.....


The interest you pay on your mortgage is generally less than the expected return on most future investments.

It doesn't mean it's a lock but I'd rather pay the mortgage off slower while investing as much money as possible into retirement.

[Kartelli]

All comes down to mindset of the individual. Lower payments + additional contributions per month = equity building plan.

I personally prefer the slightly longer mortgage with additional monthly contributions (say 1.5x the minimum amount).

For example on one of my properties, on a mortgage of 650, adding 150 extra a month saved 8 years in amortization overall.

All in all think of it as forced savings with a buffer incase of unforseen circumstances.

[lint]

Do an A/B calculation comparison for the two scenarios you're looking at. For example, I just did a quick look at $100K over 15 vs 25 years at 4% interest.

15yr amortization:
payment $739.69
interest $184.13
principle $555.56

25yr amortization
payment $527.84
interest $194.50
principle $333.34 + $211.85 = $545.19

At first glance using this simple scenario, keeping your payments the same, you're better off with a shorter amortization.

[Supa Dexta]

The 211.85 represents what?^

[lint]

Originally posted by Supa Dexta
The 211.85 represents what?^

The difference between the two payments. The 25 yr amortization has a smaller payment than the 15 yr.

[Rarasaurus]

It represents the difference in payments. 739 -527. By going with 15 years you are saving on interest and therefore putting 10 dollars extra a month to principle.

He's just showing that making the exact same payment as if you were on 15 year in the 25 year scenario you would be putting less towards principle, and are better off going 15 year.

But as stated above investing that money (211) "should" yield more than the interest of the mortgage.

[Thaco]

i don't think you guys are understanding the Q, the way i read it, he is asking, what's the advantage to getting a:

25 year and paying it in 25 years
30 years, and making extra payments, paying it off in 25 years.


AFAIK, the only difference will be the frequency and amount of extra payments, the'll have a minimal effect on your interest.


Also you have to confirm that your mortgage can take extra payments and additional monthly payments without penalty. I know with mine i can increase my regular payment any time i want. additionally i can make a lump sum payment on my anniversary date every year.






My situation is also a good example of where a longer amort is helpful, my amort is 40 years, however, when i got the morgage, i never intended to takle that long to pay it, i just had to do it that way to get approved for more, i decided to make an extra $55 per payment, as well as paying every 2 weeks, as opposed to every month, the way we had it figured, it would take under 25 years to pay that way.

however, a few months back, my wife went on mat leave, we decided we needed the money now, instead of later, so we removed the additional payments and give ourselves an extra $110/mo, and when she gets back to work, i'll have them put it back.

[Rarasaurus]

^ The post by lint shows that it is beneficial to do a 15 year vs the 25 year. This is because making the same monthly payment of 740, you actually have 10 more going to the principle on the 15 year mortgage vs the 25 year.

The difference is minor for sure in this case but it is also on a 100k and between 15 years and 25 years. I bet if you looked at like 400k and 10 years vs 35 years the difference would be more significant.

[lint]

Originally posted by Thaco
i don't think you guys are understanding the Q, the way i read it, he is asking, what's the advantage to getting a:

25 year and paying it in 25 years
30 years, and making extra payments, paying it off in 25 years.

AFAIK, the only difference will be the frequency and amount of extra payments, the'll have a minimal effect on your interest.

Also you have to confirm that your mortgage can take extra payments and additional monthly payments without penalty. I know with mine i can increase my regular payment any time i want. additionally i can make a lump sum payment on my anniversary date every year.

My situation is also a good example of where a longer amort is helpful, my amort is 40 years, however, when i got the morgage, i never intended to takle that long to pay it, i just had to do it that way to get approved for more, i decided to make an extra $55 per payment, as well as paying every 2 weeks, as opposed to every month, the way we had it figured, it would take under 25 years to pay that way.

however, a few months back, my wife went on mat leave, we decided we needed the money now, instead of later, so we removed the additional payments and give ourselves an extra $110/mo, and when she gets back to work, i'll have them put it back.

I read the OPs question correctly. Check the amortization schedule of your 40yr mortgage vs the 25yrs that you think you could pay it off. And then look at how much of your fixed payment goes towards interest vs principle. When I looked at 15 vs 25, the difference was 24.xx% vs 36.xx%.

Another way to look at it is that starting with a longer amortization, to pay it off in the same length of time will require more money than following the set schedule for the shorter amortization period. In other words, be realistic with the time frame that you're expecting to pay it off. If you plan on paying it off in 10 yrs, get a 10 yr amortization. Getting a 40yr amortization when you intend to pay it off in 10 makes little sense.

The other plus for setting a shorter amortization is that more of your payment goes towards principle, which means your equity builds faster, which means the available funds in a HELOC are larger, in the case that you need it.

[Sasuke_Kensai]

Using RBC's calculator, I got the exact same interest payments ($330.59) on a 100K, 4% mortgage, with 20 and 25 year amortizations. If the calculator is trustworthy there shouldn't be any difference if you add prepayments to make the 25 year equal to the 20 year. Maybe they lower the interest when an amortization hits 15 years?

[lint]

^^ hmmmm, good catch. scratch my example above, the calculator I was using didn't amortize correctly. Using a better calculator, there is a minimal difference between the two scenarios, if the payments tend to be the same.

[Thaco]

Also it gives you the flexibility of removing the "extra payments" if necessary, otherwise you'd have to pay a buyout and reapply for a longer term.

[benyl]

Originally posted by Thaco
Also it gives you the flexibility of removing the "extra payments" if necessary, otherwise you'd have to pay a buyout and reapply for a longer term.

You might also have the option to drop the payment to a lower amount if you are accelerated.

So, let say your base payments are $1000 bi-weekly.

You can double that to $2000 when times are good. If you keep this up for a couple of years and need to drop back, at least with TD, you can drop to less than the original payment. So you can pull back to ~$800 bi-weekly depending how long you were at $2K.

[Xtrema]

Stable income and not worry about your job?
Lower amortization, higher payments.

Why not? you don't worry about defaulting anyway. May as well save on interest.



Not stable income and worry about your job?
Higher amortization, lower payments and pay maximum into principle.

Give you flexibility in the event you go on EI.

[Thaco]

Originally posted by Xtrema
Stable income and not worry about your job?
Lower amortization, higher payments.

Why not? you don't worry about defaulting anyway. May as well save on interest.



Not stable income and worry about your job?
Higher amortization, lower payments and pay maximum into principle.

Give you flexibility in the event you go on EI.

nobody in this economy should be 100% confident in their job stability.

[Xtrema]

Originally posted by Thaco


nobody in this economy should be 100% confident in their job stability.

Nobody is, but some people have enough savings to weather a few months/years of work outage. If so, by all means lower the amortization period.

RRSP can also double as emergency funds.

If you live month to month with no emergency reserves, low amortization is not for you (neither is property ownership IMO).

[DRKM]

To the OP. With the two mortgages that I have had to deal with there is an option every year to put as much money you want onto just principle. With that in mind, if you can save money it is possible to achieve a faster payment with longer amortizations.

This is making the asumption that the investments you make using the money you are saving from longer amortizations will be greater then the intrest rates you are currently paying.

[prae]

in my mind, paying off the mortgage quick is a no brainer. Interest rates are the lowest they've ever been, and it's still a guaranteed 3-4% investment, which is a hell of a lot better than any guaranteed investment in this market.

However, I don't believe ALL of one's net worth should be tied up in the home. I also contribute to an RRSP and have cash tucked aside.

My SO and I are running a 25yr amortization but so far we're on track to pay it off in 15.

[quazimoto]

I just dont understand people that would rather dump huge amounts of money into a 4% investment where as many many many investments will bring in roughly double that on an annual basis.

[koopkoop2]

Originally posted by quazimoto
I just dont understand people that would rather dump huge amounts of money into a 4% investment where as many many many investments will bring in roughly double that on an annual basis.

Details on these investments?

[Sasuke_Kensai]

Originally posted by lint
^^ hmmmm, good catch. scratch my example above, the calculator I was using didn't amortize correctly. Using a better calculator, there is a minimal difference between the two scenarios, if the payments tend to be the same.

Also, I only looked at the first interest payment. I'm assuming the rest of the payments are equal between the two amortization periods, IF you make monthly prepayments, and interest is recalculated every month. I've never had a mortgage, so I don't know how it works.