Lump sum Payments with multiple contracts.......Should I

[LIFERBABE]

Completely payoff 1 contract or divide evenly between 2 contracts and keep making payments on both.
We are fast tracking our payments, and anticipate being able to make lump sum payments every 6 months. What's a good strategy?

 

[Laurajean1014]

Best thing to do is completely payoff one payment. This leaves you with applying the money you would have put down on the loan onto the other loan, hence doubling up. So, you will have one paid off (xxxx years early) and the other will be paid in 1/2 the time. You also are paying 1/2 the interest.

Anyway you look at it, congratulations by lowering your monthly nut!

 

[Doctor P]

I agree. Work on paying off one at a time, and pay off the highest interest rate loan first.

 

[tamu91]

I guess it doesn't make a difference if the interest rate on both were the same but if you paid the first one off, that's one less thing to keep track of and that's always a good thing

 

[Doctor P]

As has been pointed out, if you pay one off first, that reduces the COMPULSORY payment you need to make each month. Paying on both would leave you with the same compulsory payment each month, but reduce the months to pay on both contracts.

 

[vascubaguy]

ACK, sorry.... I used the wrong column (principal) instead of interest. I stand corrected!

So indeed it would be cheaper to pay off one.

9967.38 (with regular payments)
3648.98 (to split payments 50/50)
2760.20 (to pay off one, then the other)

Sorry about that...

 

[Doctor P]

Sorry, vascubaguy, but something is wrong with your math. It is mathematically impossible for things to come out the way you have outlined. If you pay down $400 in principal each month at an equal interest rate, the two options must come out the same or pretty close if I am thinking correctly. I suspect you fouled up the compounding or did not reduce the PRINCIPAL by the appropriate amount each month. I will stand corrected if you show the math, but I don't think it is possible. UPDATE: The amount of interest for the first 29 months on the loan that you were NOT paying on would be 1980.55. Big difference from your calculations. I suspect that you did not use amortized figures.

 

[vascubaguy]

Oopss... and I edited the wrong one...

Just all kinds of mistakes I'm making today... (I think it's a good time to go to lunch)



However, I'm sure there are cases where the circumstances would be different. and in the OP case, it could change substatially if there is a lump payment once every 6 months....

 

[Doctor P]

True. I did monthly prepayments as I misread the OP. If the payments are made every six months, it is very possible that the numbers could come out differently and have a quirk that makes the two options unequal. Good catch. Thanks for clarifying and pointing out my error. However, with the same interest rate on both balances, it really shouldn't matter whether one is high and one is low or both are equal since the interest would ultimately be charged on the combined balance which would not vary between the options.

 

[LIFERBABE]

I was leaning that way (paying one off completely) but I needed a little help with my numbers. Thanks so much for all the input and I will be running my lump sum payments thru my Dis Visa for more Reward Dollars.

And thank you Laurajean for the congrats!! It's a small contract, but there is something about getting that deed!

 

[vascubaguy]

Ok, I can't stop thinking about this... in my mind I still think it's better to split the payments.... so back to the loan calculators I went....

Ok... lets see if I can do this without screwing it up....
2 loans exactly the same:
Loan Amount: 15,000
Interest Rate: 6%
Term: 10 years/120 payments

If you were to pay a lump sum of $1000 extra principal ever 6 months, you would get the following:

Loan #1
Pay off time: 54 months
Interest over 54 months = $2159.79

Loan #2
Interest over first 54 months = $3334.53
Interest over next 31 months = $815.75 (with $1000 extra applied)
Total Interest = $4150.28
Total Time to payoff both loans = 85 months
Total Interest on Both loans = $6310.07

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Now if you split the payments ($500 each every 6 months)
Total Pay Off time: 72 months
Total Interest for both loans: $5939.78

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Again, this is very generic and a different situation could result in totally different results..... if you want, you could send me the details and I could do the math using your figures.

 

[Doctor P]

Now I see your flaw. You must also add the PAYMENT on the first loan in as part of the expedited payment when you pay the first loan off. Otherwise, you are not comparing apples to apples.

If the amortizing payment on the mortgage for each is $166.00 per month, you must make a regular payment of $332 dollars on the combined two mortgages each month and THEN add the extra payments. When the first mortgage is paid off, then you will pay the $166 required payment, the $166 payment from the other mortgage, PLUS the extra payments. That is the only way that the two circumstances are comparable. Otherwise, in the case where you pay off the first mortgage, you will be comparing a situation where you are actually paying less in than in the split case, so of course the interest will be less in the split case but that is because you are in effect paying an extra $166 payment per month on top of the extra payments.

 

[vascubaguy]

Now I see your flaw. You must also add the PAYMENT on the first loan in as part of the expedited payment when you pay the first loan off. Otherwise, you are not comparing apples to apples.

If the amortizing payment on the mortgage for each is $166.00 per month, you must make a regular payment of $332 dollars on the combined two mortgages each month and THEN add the extra payments. When the first mortgage is paid off, then you will pay the $166 required payment, the $166 payment from the other mortgage, PLUS the extra payments. That is the only way that the two circumstances are comparable. Otherwise, in the case where you pay off the first mortgage, you will be comparing a situation where you are actually paying less in than in the split case, so of course the interest will be less in the split case but that is because you are in effect paying an extra $166 payment per month on top of the extra payments.

Ok, I give up! No wonder I wasn't a finance or accounting major! However, after all those calculations and errors, I went back again and it appears to be a WHOLE $0.01 savings to split the payments in half.

5939.78 vs 5939.79

Thanks for catching that error... and sorry for creating any confusion...