Personal Finance

Overpayment of mortgage monthly or annually? Which option is better?

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  • Oct 26th, 2010 3:41 pm
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Newbie
Jul 18, 2009
58 posts
3 upvotes

Overpayment of mortgage monthly or annually? Which option is better?

Hi

I am sure that this thread has been discussed here. The problem that I am having when I am calculating which option is better to lower my principal. Should I pay extra monthly on my mortgage or would it better to pay the lump sum annually? I worked out the figures and I ended with the same amount if I had paid monthly and the same amount if I had paid the lump sum. I thought that if you paid extra monthly you are supposed to do better as the principal keeps coming down. Any advices from the experts here ....
7 replies
Member
Jul 9, 2008
498 posts
101 upvotes
It's all about timing. If you have the cash available you are better to pay on the first day of the year as opposed to 12 payments throughout the year. You will end up paying less interest because your average principle balance will be lower. If you don't have the cash available and can only pay a lump sum on day 365 you are better to pay monthly. If you're somewhere in between, pay what you have available now and set a monthly budget for what you can afford in monthly payments.
Sr. Member
Oct 26, 2009
620 posts
24 upvotes
Can you use both options? eg. pay 25% more on monthly mortgage payment and pay up to 25% of original mortgage amount once per year?

Suppose I have a $100,000 mortgage at 3.69%:
- monthly mortgage payment = $509.35
- 25% max extra monthly mortgage payment = $573.02
- max lump sum payment for original mortgage amount = $25,000

So can I make payments of $573.02 on a monthly basis AND pay (up to) $25,000 lump sum at the end of the year?
Sr. Member
Oct 26, 2009
620 posts
24 upvotes
25% of original mortgage amount is always greater than %25 of monthly mortgage payment per year.

Do the calculation using the example above ($100,000 mortgage):
25% of original mortgage amount > %25 of monthly mortgage payment per year
$25,000 > ($573.01-$509.35)x12
$25,000 > $764.03

Thus in this example, assuming that you can only take one of the extra payment options, if you can save more than $764.03 (I did not calculate & add the interest amounts) then it would make more sense to make a lump sum payment.
Deal Addict
Oct 14, 2004
1474 posts
438 upvotes
Toronto
It depends on the mortgage you have and which lender. Some only allow 1 payment a year, others allow as many as you want up to X% of the original/remaining value.
Deal Fanatic
User avatar
Oct 23, 2003
8455 posts
2000 upvotes
i would only do it once per year due to the fact that having that extra cash in the bank would make you sleep better at night if you have an emergency. you could lose your job the next day or god forbid a medical issue, its good to have extra cash available regardless of your savings. once you are comfortable enough anyways, or get to that point in the year, go ahead with a lump sum and start extra savings all over again for next year. :)
Sr. Member
User avatar
Feb 26, 2008
541 posts
114 upvotes
Isnt the best way to pay down mortgage is to put all ur money into the mortgage and then set up a HELOC and draw ur expenses from there since HELOC generally has lower interest rate than mortgage?
Deal Addict
User avatar
Jan 4, 2007
1804 posts
348 upvotes
GTA
in my case im aloud up to 25% of principle per year...Im aloud to do lumpsum amounts at anytime. The quicker i add to my mortgage the less interest i pay in the long run..

I have an account and whenever my buffer is exceeded for 2-3 months at a time .. i take it and dump it into my mortgage.

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