Aggressive Mortgage Repayment
It is great that you came up with a plan to own a rental home, free and clear, and also move up in home.  It is also really good of you to recognize that curtailing spending has a profound effect on your net worth, many people fail to acknowledge that factoid and prefer to instead blame things outside their control.  Good work there.  Here are some items of your plan that I have comments on. 11mo by aggressively curtailing elective spending How does your spouse feel about this?  They have to be on board, but it is such a short time frame this is very doable. cashing out all corporate stock, This will probably trigger capital gains.  You have to be prepared to pay the tax man, but this is a good source of cash for your plan.  You also have to have an additional amount that will likely be due next April 15th. redirecting all contributions to my current non-matched R401(k) This is fine as well because of the short time frame. withdrawing the principal from a Roth IRA This I kind of hate.  We are so limited in money that we can put into tax favored plans, that taking money out bothers me.  Also it is that much more difficult to save in a ROTH because of the sting of taxes.  I would not do this, but would favor instead to take a few extra months to make your plan happen. buy home #2 How are you going to have a down payment for home #2?  Is your intention to pay off home and save a while, then purchase home #2?  I would do anything to avoid PMI.   Besides I would take some time to live in a paid for house. Overall I would grade your plan a B.  If take a bit longer, and remove the withdrawing from the ROTH, it then becomes an A-.  With a good explanation of how you come up with the down payment for house 2, you could easily move to an A+.
Banks and lenders have become a bit more conservative since the housing crisis. 80% is a typical limit. The reason is to minimize the lender's risk if declining property values would put the borrower upside-down on the loan. http://www.bankrate.com/finance/home-equity/how-much-equity-can-you-cash-out-of-home.aspx My favorite story of a strategic default is from my friend who way overpaid for a house in the Bay Area. After the housing market fell, he bought a second home (with a separate mortgage), and THEN defaulted on the first house.   The lender on the first house knew that he bought a 2nd home recently, but they couldn't go after it because it was securing a mortgage to a different bank. His credit score was ruined, but it didn't matter to him because you only really need credit for a new mortgage and he already bought a new house. "One factor to consider is timing. If you set up the automatic payments through the bank that holds the mortgage (I'll call them the ""receiving"" bank), they will typically record the transactions as occurring on the actual dates you've set up the automatic payments to occur on, which generally eliminates e.g. the risk of having late payments. By contrast, setting up auto-pay through your personal bank (the ""sending"" bank) usually amounts to, on the date you specify, your bank deducts the amount from your account and sends a check to the receiving bank (and many banks actually send this check by mail), which may result in the transaction not being credited to your mortgage until several business days later. A second consideration (and this may not be as likely to occur on a loan payment as with a utility or service) is the amount of the payment. When you set up your auto-pay through the sending bank, you explicitly instruct your bank as to the amount to send (also, if you don't have enough in your account, your bank may wait to send the bill payment until you do). This can be good if finances are tight, or if you just like having absolute control of the payment. The risk, though, is that if some circumstance increases the amount that you need to pay one month, you'll have to proactively adjust your auto-pay setting before it fires off. Whereas, if you've set the auto-pay up through the receiving bank, they would most likely submit the transaction to your bank for the higher amount automatically. I'll give an example based on something I saw fairly often when I worked for Dish Network on recovery (customers in early disconnect, the goal being to take a payment and restore service). If you had set up auto-pay through your bank based on your package price, and then the price increased by $2/month, you might not notice at first (your service stays on, and your bill doesn't have any red stamps on it), but the difference will slowly add up until it exceeds a full month's payment, at which point a late fee starts being assessed. From there, it quickly snowballs until the service is turned off. Whereas if you had set that auto-pay up through the provider, when the rate increased, they would simply submit an EFT for the new, higher amount to your bank. On the opposite side of the spectrum: if you've set up the auto-pay through the sending bank, and you're not paying close enough attention when you finally pay off the mortgage, you might accidentally overpay by either making an extra payment or because the final payment is smaller than the rest. Then you'd have to wait a few days (or weeks?) for the receiving bank to issue a refund, leaving those funds unavailable to you in the interim. For these reasons, I personally prefer to always set up automatic payments through the receiving bank, rather than the sending bank." I can't believe people over 25% underwater even bother paying the mortgage anymore.  By no stretch of the imagination is this a reasonable thing to do, fiscally speaking.  To those of you who would make the moral argument that you made an agreement to pay...    1.  You also made an agreement for what the penalty is if you do not pay.  Either way you're still adhering to the agreement.      2.  It's a bank loan, not a suicide pact. "Do you now own your new home, or are you renting?  This is a classic case of a mortgage ready to blow up. These 7/1 interest only would have a low rate, say 3%. So on $200K, the payment is $500/mo, but no principal paydown. Even if the rate were still 3% (it won't be) the 23 yr amortization means a payment of $1004 after the 7 years end. At 4%, it's $1109. 5%, $1221. I would take this all into account as you decide what to do. If you now own a new house, you should consider the morally questionable walk-away. I believe you were sold an unethical product. mb wrote ""shoot up considerably."" This is still an understatement. A product whose payment is certain to double in a fixed time is 'bad.' 'Bad' in the biblical sense. You have no obligation to keep any deal with the devil, which is exactly what you have.  There are some banks offering FHA products that might help you. I just received an offer from the bank holding a mortgage on my rental property. It's 4.5% for a refinance up to 125% of current value. There's a cost of $1800, but I owe so little, and am paying it off faster than the time left, I'm not bothering. You may benefit from such a program, but I'd still question if you can make a go of a house that even 2% underwater. Do some math, and see if you started now with a 30 year loan how the numbers work out.  (Forgive my soapbox stance on this. There are those who criticize the strategic defaulters. I think you fall into a group of innocent victims who were sold a product that was nothing less than a financial time bomb. I am very curious to know the original ""interest only"" rate, and the index/margin for the rate upon adjustment. If you include the original balance, I can tell you the exact payments based on the new rates pretty easily.)" "The original question was aimed at early payment on a student loan at 6%. Let's look at some numbers.  Note, the actual numbers were much lower, I've increased the debt to a level that's more typical, as well as more likely to keep the borrower worried, and ""up at night.""  On a $50K loan, we see 2 potential payoffs. A 6 year accelerated payoff which requires $273.54 extra per month, and the original payoff, with a payment of $555.10. Next, I show the 6 year balance on the original loan terms, $23,636.44 which we would need to exceed in the 401(k) to consider we made the right choice.  The last section reflects the 401(k) balance with different rates of return. I purposely offer a wide range of returns. Even if we had another 'lost decade' averaging -1%/yr, the 401(k) balance is more than 50% higher than the current loan debt. At a more reasonable 6% average, it's double. (Note: The $273.54 deposit should really be adjusted, adding 33% if one is in the 25% bracket, or 17.6% if 15% bracket. That opens the can of worms at withdrawal. But let me add, I coerced my sister to deposit to the match, while married and a 25%er. Divorced, and disabled, her withdrawals are penalty free, and $10K is tax free due to STD deduction and exemption.) Note: The chart and text above have been edited at the request of a member comment.  What about an 18% credit card? Glad you asked -  The same $50K debt. It's tough to imagine a worse situation. You budgeted and can afford $901, because that's the number for a 10 year payoff. Your spouse says she can grab a extra shift and add $239/mo to the plan, because that' the number to get to a 6 year payoff.  The balance after 6 years if we stick to the 10 year plan? $30,669.82. The 401(k) balances at varying rates of return again appear above. A bit less dramatic, as that 18% is tough, but even at a negative return the 401(k) is still ahead. You are welcome to run the numbers, adjust deposits for your tax rate and same for withdrawals. You'll see -1% is still about break-even.  To be fair, there are a number of variables, debt owed, original time for loan to be paid, rate of loan, rate of return assumed on the 401(k), amount of potential extra payment, and the 2 tax rates, going in, coming out. Combine a horrific loan rate (the 18%) with a longer payback (15+ years) and you can contrive a scenario where, in fact, even the matched funds have trouble keeping up. I'm not judging, but I believe it's fair to say that if one can't find a budget that allows them to pay their 18% debt over a 10 year period, they need more help that we can offer here. I'm only offering the math that shows the power of the matched deposit.   From a comment below, the one warning I'd offer is regarding vesting. The matched funds may not be yours immediately. Companies are allowed to have a vesting schedule which means your right to this money may be tiered, at say, 20%/year from year 2-6, for example. It's a good idea to check how your plan handles this. On further reflection, the comments of David Wallace need to be understood. At zero return, the matched money will lag the 18% payment after 4 years. The reason my chart doesn't reflect that is the match from the deposits younger than 4 years is still making up for that potential loss. I'd maintain my advice, to grab the match regardless, as there are other factors involved, the more likely return of ~8%, the tax differential should one lose their job, and the hope that one would get their act together and pay the debt off faster." "Your first question has been answered quite well already. To answer your second question: ""If you pay extra, do you want the extra to go toward the interest or   toward the principal?"" This gives the consumer some flexibility to decide how additional payments are applied. It might seem like a no-brainer to always apply extra payments towards principal - that way, the interest amounts on future payments will be lower and (if you're billed a fixed amount each month) more of each regular payment will then be applied to principal, shortening the term of the loan. However, while it would mean spending more over the life of the loan, there are certain advantages to applying extra payments towards interest†. The main advantage is that it pays your account ahead and means you don't have to make another payment as soon. You could use this strategy to give yourself a buffer of several months, so that if you should ever run into financial hardship you can stop making mortgage payments for a while without the risk of foreclosure. † Note, in most cases it's more likely that you are simply paying more without specifying to the lender that it should be used as principal curtailment. I haven't seen cases where you can explicitly ask the extra to be ""applied toward interest"". In this situation the funds would be held until you've provided enough to cover one or more monthly payments in full, at which point your ""next payment due"" date will simply be extended.  Another advantage is that the funds that are being held (not due yet, not allocated toward any specific payment, maybe held in escrow) may be refundable to you, upon request. This would depend on the lender's policy. Some will permit refunds of credit balances that go beyond what is necessary to cover the current month's bill. Whether you apply extra payments towards principal or not, it makes little difference to the bank. Any additional payments received increase their immediate cash flow. The cash can be reinvested immediately by them into whatever they are currently focusing on." There is no interest outstanding, per se.  There is only principal outstanding.  Initially, principal outstanding is simply your initial loan amount. The first two sections discuss the math needed - just some arithmetic. The interest that you owe is typically calculated on a monthly basis.  The interested owed formula is simply (p*I)/12, where p is the principal outstanding, I is your annual interest, and you're dividing by 12 to turn annual to monthly. With a monthly payment, take out interest owed.  What you have left gets applied into lowering your principal outstanding.  If your actual monthly payment is less than the interest owed, then you have negative amortization where your principal outstanding goes up instead of down. Regardless of how the monthly payment comes about (eg prepay, underpay, no payment), you just apply these two calculations above and you're set.  The sections below will discuss these cases in differing payments in detail. For a standard 30 year fixed rate loan, the monthly payment is calculated to pay-off the entire loan in 30 years.  If you pay exactly this amount every month, your loan will be paid off, including the principal, in 30 years.  The breakdown of the initial payment will be almost all interest, as you have noticed.  Of course, there is a little bit of principal in that payment or your principal outstanding would not decrease and you would never pay off the loan. If you pay any amount less than the monthly payment, you extend the duration of your loan to longer than 30 years.  How much less than the monthly payment will determine how much longer you extend your loan.  If it's a little less, you may extend your loan to 40 years.  It's possible to extend the loan to any duration you like by paying less.  Mathematically, this makes sense, but legally, the loan department will say you're in breach of your contract. Let's pay a little less and see what happens.  If you pay exactly the interest owed = (p*I)/12, you would have an infinite duration loan where your principal outstanding would always be the same as your initial principal or the initial amount of your loan.   If you pay less than the interest owed, you will actually owe more every month.  In other words, your principal outstanding will increase every month!!!  This is called negative amortization.  Of course, this includes the case where you make zero payment.  You will owe more money every month. Of course, for most loans, you cannot pay less than the required monthly payments.  If you do, you are in default of the loan terms. If you pay more than the required monthly payment, you shorten the duration of your loan.  Your principal outstanding will be less by the amount that you overpaid the required monthly payment by.  For example, if your required monthly payment is $200 and you paid $300, $100 will go into reducing your principal outstanding (in addition to the bit in the $200 used to pay down your principal outstanding).  Of course, if you hit the lottery and overpay by the entire principal outstanding amount, then you will have paid off the entire loan in one shot! When you get to non-standard contracts, a loan can be structured to have any kind of required monthly payments.  They don't have to be fixed.   For example, there are Balloon Loans where you have small monthly payments in the beginning and large monthly payments in the last year.   Is the math any different?  Not really - you still apply the one important formula, interest owed = (p*I)/12, on a monthly basis.  Then you break down the amount you paid for the month into the interest owed you just calculated and principal.  You apply that principal amount to lowering your principal outstanding for the next month. Supposing that what you have posted is accurate, the most likely scenario is that you have a structured 5 year car loan where your monthly payments are smaller than the required fixed monthly payment for a 5 year loan, so even after 2 years, you owe as much or more than you did in the beginning!  That means you have some large balloon payments towards the end of your loan.  All of this is just part of the contract and has nothing to do with your prepay. Maybe I'm incorrect in my thinking, but I have a question about   prepaying a loan. When you take out a mortgage on a home or a car   loan, it is my understanding that for the first years of payment you   are paying mostly interest. Correct. So, let's take a mortgage loan that allows prepayment without penalty.   If I have a 30 year mortgage and I have paid it for 15 years, by the   16th year almost all the interest on the 30 year loan has been paid to   the bank and I'm only paying primarily principle for the remainder of   the loan. Incorrect.  It seems counter-intuitive, but even in year 16, about 53% of your monthly payment still goes to interest!!!  It is hard to see this unless you try to do the calculations yourself in a spreadsheet. If suddenly I come into a large sum of money and decide I want to pay   off the mortgage in the 16th year, but the bank has already received   all the interest computed for 30 years, shouldn't the bank recompute   the interest for 16 years and then recalculate what's actually owed in   effect on a 16 year loan not a 30 year loan? It is my understanding   that the bank doesn't do this. What they do is just tell you the   balance owed under the 30 year agreement and that's your payoff   amount. Your last sentence is correct.  The payoff amount is simply the principal outstanding plus any interest from (p*I)/12 that you owe.  In your example of trying to payoff the rest of your 30 year loan in year 16, you will owe around 68% of your original loan amount. That seems unfair. Shouldn't the loan be recalculated as a 16 year   loan, which it actually has become? In fact, you do have the equivalent of a 15 year loan (30-15=15) at about 68% of your initial loan amount.  If you refinanced, that's exactly what you would see.  In other words, for a 30y loan at 5% for $10,000, you have monthly payments of $53.68, which is exactly the same as a 15y loan at 5% for $6,788.39 (your principal outstanding after 15 years of payments), which would also have monthly payments of $53.68. A few years ago I had a 5 year car   loan. I wanted to prepay it after 2 years and I asked this question to   the lender. I expected a reduction in the interest attached to the car   loan since it didn't go the full 5 years. They basically told me I was   crazy and the balance owed was the full amount of the 5 year car loan.   I didn't prepay it because of this. That is the wrong reason for not prepaying.  I suspect you have misunderstood the terms of the loan - look at the Variable Monthly Payments section above for a discussion.   The best thing to do with all loans is to read the terms carefully and do the calculations yourself in a spreadsheet.  If you are able to get the cashflows spelled out in the contract, then you have understood the loan. The loan is very likely to be syndicated, yes. I only state 7-10 because all of our loans to this point have been 7 year terms. And in many ways, this loan is just one of those loans, multiplied out in a modular sense. Leverage increase returns, but also risks, ie, the least you can pay, the greater the opportunity to profit, but also the greater the chance you will be underwater. Leverage is given by the value of your asset (the house) over the equity you put down. So, for example, if the house is worth 100k and you put down 20k, then the leverage is 5 (another way to look at it is to see that the leverage is the inverse of the margin - or percentage down payment - so 1/0.20 = 5). The return on your investment will be magnified by the amount of your leverage. Suppose the value of your house goes up by 10%. Had you paid your house in full, your return would be 10%, or 10k/100k. However, if you had borrowed 80 dollars and your leverage was 5, as above, a 10% increase in the value of your house means you made a profit of 10k on a 20k investment, a return of 50%, or 10k/20k*100. As I said, your return was magnified by the amount of your leverage, that is, 10% return on the asset times your leverage of 5 = 50%. This is because all the profit of the house price appreciation goes to you, as the value of your debt does not depend on the value of the house. What you borrowed from the bank remains the same, regardless of whether the price of the house changed. The problem is that the amplification mechanism also works in reverse. If the price of the house falls by 10%, it means now you only have 10k equity. If the price falls enough your equity is wiped out and you are underwater, giving you an incentive to default on your loan. In summary, borrowing tends to be a really good deal: heads you win, tails the bank loses (or as happened in the US, the taxpayer loses). It may have been the standard practice for a long time, and indeed it still is the common practice for my credit union to apply all excess payment directly to the principal. At the risk of sounding a little cynical, I will suggest that there is a profit motive in the move to not applying excess payments to principal unless directly instructed to do so. Interest accrued isn't reduced until the principal is reduced, so it benefits the creditor to both have the money in advance and to not apply it to the principal. You should probably move forward with the expectation that all of your creditors are adversarial even if only in a passive-aggressive manner. My advice to you? Act like responsible adults and owe up to your financial commitments.  When you bought your house and took out a loan from the bank, you made an agreement to pay it back. If you breach this agreement, you deserve to have your credit score trashed.  What do you think will happen to the $100K+ if you decide to stiff the bank? The bank will make up for its loss by increasing the mortgage rates for others that are taking out loans, so responsible borrowers get to subsidize those that shirk their responsibilities. If you were in a true hardship situation, I would be inclined to take a different stance. But, as you've indicated, you are perfectly able to make the payments -- you just don't feel like it. Real estate fluctuates in value, just like any other asset. If a stock I bought drops in value, does the government come and bail me out? Of course not! What I find most problematic about your plan is that not only do you wish to breach your agreement, but you are also looking for ways to conceal your breach. Please think about this. Best of luck with your decision. In the US, our standard fixed rate mortgages would show no difference. My payment is calculated to be due on the 1st of each month.  When I first got a mortgage, I was intrigued by this question, and experimented. I paid early, on the 15th, 2 weeks early, and looked at my next statement. It matched the amortization, exactly. Mortgages at the time were over 12%, so I'd imagine having seen the benefit of that 1/2% for the early payment.  Next I paid on the last day before penalty, in effect, 2 weeks late. I expected to see extra interest accrue, again, just a bit, but enough to see when compared to the amortization table. Again, no difference, the next statement showed the same value to the penny. Yes, I think you're correct. I think it was more like.  Paul Singer: Pay up on time and in full or I will ruin your credit history so bad you'll never be able to get a loan again.   Argentina: Burn the house, we will call the BRIC bank to re-build. "We payed off our Mortgage early...at first in small extra payments to principal, and finally a lump sum.  Each extra payment to principal reduced the balance, and reduced every payment going forward.  I have, somewhere, an excel spreadsheet where I tracked this...  - =CUMIPMT((interestRate/12),term,pymtNumber,balance,balance,0) computed the interest payment due  - =currentPrincipal + CUMIPRINTresultAbove computed the monthly principal payment Occasionally I would update the month-ending Principal balance against what the mortgage company told me.  It was usually off by a little.   My mortgage company required me to specifically contact them for a payoff amount before I wrote the final check.   I've never heard of a mortgage where prepayment of all expected interest following the original schedule is required.  I would guess it is against federal (US) law.  Lets think about that for a moment...  out of ""interest"", I recently computed that for our 30 year loan at 6-5/8% on about 145, we payed a total of 106000 in interest.  That include a refi to 4-7/8 10-years in to a 15-year loan, and paying it off 20 years after the original loan was granted. As far as not paying all the theoretical interest due...  - If they get a fixed dollar amount of service interest back, there's no incentive to me to pay on-time.  I owe the same amount if I pay it today or if I pay it 6 months late, after I gambled the mortgage money and finally won.  (yea, I know they could write the mortgage to penalize me for paying late, but I'm ignoring that)  - if you were requried to pay off all the interest that might accrue, how could you ever sell your home, or refinance, for that matter?  When I refi'd, the new holder payed the old holder 98,000.  If the original holder had required prepayment of all the interest that would be accrued to the original schedule, the new mortgage would've been 200k.  It would just never be a good deal to buy a home if mortgages worked under that term. I have had a car loan that worked differently -- they pre-computed the total interest due and then divided it over the term of the loan equally.  I could pay off early and they stopped collecting interest."