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July 13th, 2012

Is it better to prepay my loan monthly or with one lump sum?



Portrait of a relaxed young couple using a laptopHere’s a recent question we received from a reader:

Question: We refinanced our mortgage of $55,000 in 2005 at 5.5 percent interest for 15 years. For the last year I have been paying an extra $100 to $200 a month on principal.  Will it pay off the mortgage a lot sooner if we make a one-time payment of $5,000 toward principal?

Here’s my answer:

Answer: Without precise amounts, dates or prepayments, it’s hard to be very exact about your savings. That said, here are some details, developed with the use of HSH.com’s downloadable Homebuyers Calculator Suite.

Starting with a July 2005 date, your 15-year loan without prepayments is slated to end in June 2020, with a total interest cost of $25,891. If you have been making additional $100 payments over the last year (payments 73-84), you have shortened your term by four months (the last payment would be made February 2020). So far, you have saved about $695 in interest costs.

If you keep making additional $100 payments going forward, your loan would come to a conclusion in June 2018, about two years early. Your total interest cost will be $23,499, so you would have saved about $2,392 overall.

Read: HSH.com’s one big idea for 2012: Prepay your mortgage

If you broke that one-time payment of $5,000 into 50 $100 chunks, you would make additional $100 prepayments from payments 73 through 134 (through August 2016). After that, if you made no more prepayments, your loan would end in December 2018, with a total interest cost of $23,620.

If you decided to stop making the additional $100 payments today and instead sent in a check for $5,000, you would see your loan come to an end in October 2018, with a total interest cost of $22,844.

Overall, the answer to your question, “Will it pay off the mortgage a lot sooner if we make a one-time payment of $5,000 toward principal?” is “no, not a lot sooner.” That’s due to several factors, not the least of which is the short(er) term of your mortgage to begin with and that you are already about halfway through the term.

With the July 2012 payment, you have already paid about two-thirds of all the interest due, so your required monthly payment is largely comprised of principal at this point.

As with refinancing, more benefit from prepaying comes early in the mortgage. For example, if you sent an additional $100 from the first payment, your loan would have ended in September 2016 with just an $18,772 interest charge. That one-time $5,000 prepayment sent in at payment 13 would have ended your loan in August 2018…or July 2018 if you sent it in with the first payment.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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