Help me with some simple math

Posted by Kromey at 8:51pm Sep 17 '12
You must sign in to send Kromey a message
So last week I made my first mortgage payment. Well, my first two, actually, owing to the fact that I have two mortgages, the sum total of which adds up to the purchase price of our house. (It's just how the no down payment, 100% financing deal worked -- two banks pick up and split the liability.)

Anyway, it got me thinking: I know that paying as little as $20 extra per month can shave a full year and more than $7,000 from my total payments. But, with two loans, is there a more advantageous strategy?

Consider the specifics:
Both mortgages are fixed-rate at 4.375%, for 30 years. Mortgage A has the bulk of the principal ($200,600), while mortgage B has what really amounts to a token amount ($35,400). Additionally, my property taxes and homeowner's insurance are rolled into the monthly payments I make to A; my payments to B then are strictly loan payments.

Now for the assumptions:
Assume I have a fixed amount each month to add to my monthly payments; let's say it's $50.
Assume that if one mortgage is repaid, I will immediately shift the amount I was paying on that one to the other, i.e. the entire monthly payment (including all extra).
Assume that I will not refinance (for calculation purposes, that is).

My thoughts:
First off, I've been too long out of school to remember how to crunch these numbers, so these are just my hunches, although I like to think they're based on some primal knowledge of maths still in my brain somewhere.

However, I have two competing theories:
1) I should put the entire extra $50 toward the larger balance, A, because 4.375% of that (yes, I know the APR and actual annual interest are not the same, but this is good enough since both balances have an identical rate) is much more than 4.375% of B, and therefore paying down the larger balance faster will have a greater impact on how much I pay overall.

2) I should put the entire extra $50 toward the smaller balance B, because it will be affected a lot more and therefore paid off a lot faster, and then I can take that payment and direct it wholly at A to pay it off faster.

Please help me figure out where it would be most advantageous for me to put my extra pre-payment!

added on 9:11pm Sep 17 '12:
I forgot to add competing theory number 3:
3) It makes no difference, since both balances have the same interest rate attached, and X% of Y is always X% of Y. Therefore any advantage to pre-paying one over the other is purely psychological.
There are 14 private posts in this thread. You need to sign in to read them.

Below are the public posts you may view:

You currently have read-only access to this board. You must request an account to join the conversation.

Why Join 4thKingdom?

Note that there are no ads here. Just intelligent and friendly conversation. We keep the spam out, the trolls out, the advertisers out… 4K is just a low-key, old-fashioned site with members from around the world.
This community began in 1998, and we continue to accept new members today.

Hot Discussion Topics: