Comment by kbutler | Hacker News Reader

Comment by kbutler | Hacker News Reader

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This is a misunderstanding of how traditional mortgage payments and interest are calculated.

A mortgage payment includes a fixed amount of "principal + interest". The interest portion is calculated each month based on the outstanding principal.

Every dollar of principal you pay early reduces the amount of interest you pay in every payment thereafter.

You are correct that you still have to pay the same monthly payment, but it is knocking off the immediate next payment (which is high interest, low principal), rather than knocking off the last payment (which is high principal, low interest).

Paying additional principal near the beginning of a mortgage thus makes a lot of sense (it eliminates interest on that amount for the next 360 months).

To clarify, my definition of savings refers to "payments you would not have had to make". Regardless of the proportion of principal to interest, the payment is still the contractual amount you have to pay each month. If you have a fixed minimum payment, any extra payment you make is not impacting the amount due next month.

To your point, yes, next month's payment has a higher ratio of p:i, but you have not "saved" anything...yet. In the end, the extra payments you make are just going towards reducing the maturity date of the loan. You are correct that the relative impact of making these extra payments early on does have a tremendous influence on the total interest saved over the life of the loan (and determines how many minimum payments you will chop off the end of your term). I didn't make that clear in my initial comment.

Just to add to this - floating rate loans are common here, with a fixed date of mortgage ending. So an early payment in this situation leads to a lower payment next months (probably by a few cents or a dollar to 2 if you made a decent lump sum payment). It isn't much, but depending on initial mortgage setup a saving for next month can be realised.

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