# Extra Mortgage Principal Payment Math

Fixed

1 Like

I refinanced my house around 2016 at 3.375% mortgage rate. Today the interest rates from the same lender are showing up as 4.625%.

If I discount the mortgage based on present value at today’s interest rates then the mortgage note has already lost 12% of its value if someone tried to resell that mortgage on the open market after only 2 years.

That effectively means the mortgage note is losing value faster than the interest payments. In addition to that, the mortgage is being wiped out by inflation.

For the lender in the best case scenario even if inflation stays at 2% for the next 30 years (I don’t think it will) then the lender is getting almost no real rate of return at 3.375% interest - 2% inflation = 1.375% return. In the worst case scenario if inflation picks up then the mortgage gets wiped out.

So from the lender’s perspective there is very little upside and on the downside there is tremendous risk… a one sided deal for the borrower. Remember the lender’s loss is always the borrower’s gain. Paying off a mortgage at a low interest rate would just be dumb IMO even regardless of tax considerations.

2 Likes

Thats why the “lender” just originates the loan and immediately sells it to Fannie and pockets an immediate profit. The only “lender” you refer to that has a risk is the collective “taxpayer”/citizen.

2 Likes

Especially while inflation and interest rates are expected to go up.

But the article did not take into account inflation, taxes or investments, and OP didn’t ask about them. The article only talked about a savings account and got that wrong.

Not exactly. Fannie is not the FED, does not print money. I don’t think they carry any risk from rising interest rates, as they also resell the mortgages and take a fee.

It depends entirely on what you do with the cash you would use to make those extra payments. If you are going to save it at 1% interest rate, then it’s not such a great deal. If you are going to blow the extra cash as found money, paying down the mortgage is always the wiser choice.

1 Like

FHFA says they have a current risk of another ~\$100B. (not from rising interest rates though)
Fannie and Freddie could need \$100 billion bailout in next crisis, stress test finds - MarketWatch
"The Federal Housing Finance Agency released the results of a stress test that examined how the mortgage finance companies would perform in what’s called a “severely adverse scenario.” The stress test was mandated by the post-financial-crisis Dodd-Frank Act and the specifics of the scenario were devised by the Federal Reserve.

The test found that Fannie FNMA, -1.30% and Freddie FMCC, -0.66% together would require between \$34.8 and \$99.6 billion, FHFA said. That’s an improvement from last year, when FHFA said the enterprises would need \$125.8 billion.

The two government-sponsored enterprises have operated under federal conservatorship since the 2008 crisis."

I can’t understand (and don’t want to enough to research) the Wikipedia page on how the conservatorship works, so I’m not sure whether saying they can print money would be a valid imagery or not. But the general jargon sure seems to be as close as you can get to Printing Money. I didn’t use that term, though. from:
Federal takeover of Fannie Mae and Freddie Mac - Wikipedia
"In addition to the government conservatorship, which CBO estimates will increase the federal government’s net liabilities by \$238 billion, several government agencies have taken steps to increase liquidity within Fannie Mae and Freddie Mac. Among these steps includes:[38]

Federal Reserve purchases of \$23 billion in GSE debt (out of a potential \$100 billion) and \$53 billion in GSE-held mortgage backed securities (out of a potential \$500 billion).
Federal Reserve purchases of \$24 billion in GSE debt.
Treasury Department purchases of \$14 billion in GSE stock (out of a potential \$200 billion).
Treasury Department purchases of \$71 billion in mortgage backed securities
Federal Reserve extension of primary credit rate for loans to the GSEs"
also
“The on- or off-balance sheet obligations of the two GSEs, which are “independent” corporations rather than federal agencies, are just over \$5 trillion, a significant amount when compared to the \$9.5 trillion of officially reported United States public debt at the time of the takeover.[39] The September 6, 2008 conservatorship and the subsequent planned Treasury infusion of capital support the senior liabilities, subordinated indebtedness, and mortgage guarantees of the two firms. Some observers see this as an effective nationalization of the companies that ultimately places taxpayers at risk for all their liabilities.[40]”

I also don’t want to do that much research right now, but my understanding is that the losses of Fannie and Freddie stemmed from insuring subprime mortgages, which went belly up with the housing crash. So really it is from mortgage defaults, fueled in part by falling real estate prices. My understanding is that the risk they still carry is in those loans, not from any post-crisis loans.

The actual lender l33tsauce was probably referring to is whoever invests in the MBSs issued/insured by the GSEs. The guarantee is only that the loan will be paid off. The interest rate risk is inherent and assumed by the actual lender (not by the taxpayer). That’s my understanding anyway.

cough off-topic cough

2 Likes

Inflation, taxes, and risky investments are also all off-topic, since the article only talks about savings accounts and ignores inflation and taxes (and OP didn’t ask).

Where are the mods??

Aren’t cows usually more concerned with the tastiest looking patch of grass?

1 Like

I’m not picky when it comes to mowing the lawn.

The author’s calculation is off on #1. Assume the one extra payment goes to the principle (not future payment). The extra payment in the beginning of the mortgage doesn’t equal to one month faster in pay off.

In the early months of the mortgage, the monthly contributions to the principle and interest are relatively stable (according to the author, they are \$360 and \$1,640 respectively). The extra \$2,000 in principle payment is roughly the same as the contribution to the principle of the next 5.5 months (\$2,000 / \$360). This means you are going to pay off the mortgage 5.5 months faster. The interest saving is 5.5 month x \$1,640 / month = \$9,020.

1 Like

They’re correct in that the additional payment will “only” save \$60 that month. They fail to consider that the \$60 continues to be saved every month for the remaining term of the mortgage. Lowering the outstanding balance by \$2k affects the interest calculation every month, until the point when that \$2k would’ve been paid by the regular monthly payment anyways.

1 Like