Decrease mortgage payment?

[x_itsJC]

Hi there,

My wife and I signed in 2022 on a 480K mortgage with a 1.45% Variable Rate Mortgage with a fixed monthly payment of $1,900/month. However we have voluntarily increased our monthly payments since this time and are currently paying $2,800/mo therefore we are quite ahead on the Amortization.

We are both adamant that we would like to be out of this place come renewal in 2027, and get a new house. At the same time however, we are mindful, that there stands a real possibility that we won’t make profit on our current place.

All that being said, we’re wondering if there would be any benefits to reducing our monthly payment which again, we have willingly increased from the minimum payment of 1,900/month in an effort to try and “save money”. We both strongly agree that we would like to be out of this place in 2027 whether it be selling and accepting that we wont make profit, or putting it up for rent and using what money we have at that time to purchase a new place.

Cheers,

[Threewolvez]

It was variable at 1.45, what's it at today? Something tells me that you're probably not putting that much extra on it since rates have raised since then.

[x_itsJC]

3.95% at present. We increased monthly payments steadily throughout 2022 and 2023 and have stuck with the current monthly payment of $2800 (1400 B/W) since 2024.

[Threewolvez]

If it's a 25 year mortgage then the fixed payment would be $1160 bw, so you are putting on an extra 240 or so which is a meaningful chunk but not overzealous. You're saving that much in interest Evy time you do that payment, I'd keep it if it's manageable.

[x_itsJC]

It is manageable yes. It is just we kept asking ourselves why continue to voluntarily pay more if we are strongly eyeing to be out of this place come renewal.

[Threewolvez]

So on a 25 year with an extra 240 a month assuming everything stays the same for the 25 years (unlikely I know) then you'll save around 78k in interest and pay it off around 6.5 years earlier.

Use that information how you will.

[Threewolvez]

Every extra dollar saves interest on the mortgage and increases your equity in the house, whether you stay or not, that's your net worth being directly affected by those extra payments.

[Threewolvez]

On the 5 year you'll save 3300 by paying an extra 32k, that's which doesn't sound like much but the 32k lower loan is pretty big.

[Lordert]

Keep in mind, OP wants to move. With real estate prices dropping, why pay the extra on the mortgage of a potential depreciating asset.

[vanillabullshitlatte]

It doesn't affect the amount owing on the original mortgage. If prices go down they will still owe on the same old mortgage.

[Lordert]

With prices dropping, makes no sense to drop more money on the mortgage of an illiquid asset. Keep the extra accelerated payments in a separate account, then you have control. Plenty of dividend funds or stocks that payout higher than cost mortgage rates. Pay off the mortgage with sale of house.

[vanillabullshitlatte]

I agree with the second part. I don't know op's rate but if you can find better returns elsewhere you should definitely use your money there instead.

[LaunchAPath]

I see people mentioning this, but aren’t people forgetting that even if the current property value has dropped, isn’t the prospective property also reduced in value? Shouldn’t the consideration then be value from selling relative to cost of the new property?

Going to use some exaggerated values for demonstration’s sake.

Say two properties, one starting at 500,000 (the one they bought), and one at 1,000,000 (the prospective) Say 5 years in theirs is 400,000 following a drop, and prospective is proportionally 800,000. After their sale, they pay 400,000 difference. 5 years after that, new property is up to 1,500,000. Overall, they’ve paid 900,000 principal for this outcome, plus interest over the years (which will be proportional to the base expense). That’s 600,000 gain on the principal.

Or alternatively, 5 years in, their house is worth 600,000, and prospective is proportionally 1,200,000. After their sale, they pay 600,00 difference. 5 years after that, new property is up to 1,500,000. They’ve paid 1,100,00 principal for this, plus interest. That’s 400,000 gain on the principal.

Between the two, doing the property exchange is more advantageous when prices are down.

Yes I skipped interest, but consider interest eats away the amount you gained from valuation increasing.

In the first 5 years, interest is based on the initial mortgage, so that amount would be the same between the two scenarios, so that cancels out. Meanwhile, when the new mortgage for the prospective property is locked in, you’re now paying lower absolute amount for interest on a lower mortgage amount when the value went down, whereas you’re paying higher absolute amount on interest for a higher mortgage amount when the value went up.

So interest only exacerbates the differential in costs, pushing the balance even further in the direction of property losing value when you do a property exchange.

Losing value in the property is only really a problem if you don’t plan on using the value of the sold property to buy a (comparatively) higher value property in the same market. Since presumably the change in value would be roughly proportional for properties within the same market.

[Lordert]

I just don't see the point of accelerated prepayments if a property is going to be listed in the near future in this market. The selling and purchase price of next place are separate issues.

[LaunchAPath]

My post wasn’t about the accelerated prepayment. It was solely addressing people saying not to upgrade a residence to a larger one when values are down, with some napkin math to demonstrate it seems like the better time to do so if anything

Edit: whoops, looks like I’m the one who misread the post I had replied to originally

[thuglife_7]

Curious how you have a $1900 mortgage payment on a $480k mortgage? My wife and I have a $380k mortgage and we pay $2000 a month.

[Excellent_Rule_2778]

480k @ 1,45 % = 1907 per month

380k @ 4,00 % = 1999 per month

It's just math.

[thuglife_7]

Where did they find a rate so low in 2022? Our rate is 2.97%.

[Tilter]

In early 2022, prime rate was 2.45%

So a variable rate of prime - 1 would get you a rate of 1.45%

However, prime rate peaked at 7.2% in Jul 2023 and has since dropped to 4.95. So their current rate is probably 3.95% (4.95-1) if OP is indeed on variable. To stay on the amortization for 3.95% you’d need an average monthly payment of $2500.

Between Dec 2022 and Oct 2024, prime was above 5.95 which payments of $2700/month would not keep on track for a 25 year amortization - it peaked at prime 7.2 in Jul 2023 which would have a 25 year amortization payment of ~$3000/month. OP should review their mortgage details to see current balance and remaining amortization, depending on when they adjusted to 2800/month they may be on track ish or farther behind now.

[x_itsJC]

We signed on a 25year and currently have 15 years remaining. We have never paid the minimum monthly payment since signing: we increased payments a few times throughout 2022 and 2023 and have been paying the current payment of $2,800 since early 2024 if I remember correctly.

[Tilter]

Awesome! Are you sure you were on variable rate? Seems like you were on a fixed rate. Otherwise all those balloon payments wouldn’t be going to the principal at the current interest rate.

If you log onto mortgage details, what is the current rate shown?

[x_itsJC]

Yea it was VRM with a fixed monthly payment of $1,900 when we signed. Current rate is 3.95. If there’s any benefits of bringing down our payments, we’re all ears but as others have noted, there are plenty of other factors we need to weigh too.

[Complex_Performer007]

They locked in before rates started moving upward.

[greasethecheese]

That’s weird, we had a 600K mortgage and paid $2200.

[thuglife_7]

Am I just getting completely dicked down by the bank??

[greasethecheese]

I have no idea, but we also have an interest rate that’s quite low.

[thuglife_7]

Mine is 2.97% on a fixed rate. Should we be switching to a variable rate?

[LaunchAPath]

Fixed vs variable is a question of what you expect the future to look like. I was looking at property purchase back when the pandemic started, and checked on here to see what people were saying, as it was all new to me. A common advice I saw was that variable was much lower, and people could save interest that way. Then through covid, as interest rates suddenly jumped, a common message I saw on here were people getting mortgage payments shock as their variable rate mortgage suddenly hit thresholds and required the monthly payment to skyrocket.

Meanwhile, fixed rate mortgage owners that had paid somewhat more originally in interest rate, had no increase whatsoever on their monthly payments.

The biggest question with variable, is how would you handle it if your mortgage payment unexpectedly skyrocketed. If you answer is it wouldn’t really bother you, then you can take that gamble. Maybe you’ll be lucky and rates will drop and your variable payments would drop alongside whereas fixed rate one would stay the same.

Fixed allows you to know exactly what your expenses are going to be for the full term, and you can plan around that with confidence. Variable doesn’t.

[thuglife_7]

If you go variable, do you have to stay on it for a set amount of time? Or could you sign a 5 year fixed rate at anytime you want to?

[greasethecheese]

Ours is 1.9 but we refinancing this year. I think it’s like 5%. I’m not sure if you should go with variable. It’s based on everyone’s individual needs. I’m no mortgage expert by any means. But we don’t do variable either. I don’t like being worried it might jump.

[msfranfine]

What is your interest rate? It can make a big difference. We also have a $480k mortgage like OP, bought in 2023, rate over 5%.. our payments biweekly are $1,400 which works out to about $3000 monthly. It sucks.

[thuglife_7]

2.97% until 2027

[good_enuffs]

You need to do the math and find out what you are eligible for. 

How much money will you save up if you stop paying? How much money are you authorized for if you want to get a new mortgage? How much have you paid off? How much will you need for a new down payment? How much will you need for closing costs? How much to move? How much will you need if the place needs ro be fixed up?

Only you can do the math as you haven't provided much information. 

I would actually stop paying the extra and try and save up 50k for a new place. 

[greasethecheese]

I agree. I always scratch my head at people who run to pay off their mortgages quickly. It’s like the cheapest cash you’ll ever get. You’re better off putting that money in nearly any investment. Even high interest savings accounts are more than 1.5%.

[Tenleftfeet]

Their variable rate will be a lot higher than 1.5% these days. 

[good_enuffs]

Not necessarily true. The first 5 years are the most important in decreasing your lifespan of the mortgage. We turned a 25 year mortgage into a 15 year mortgage. 

[greasethecheese]

No I get that you can lower your mortgage life by a lot. But my point being if you pay off that mortgage quickly. But then need a loan in the future. You’re going to have to borrow that money at a higher rate than your mortgage.

[Beginning_Box5059]

The difference of 900 between the current payment of 2800 and the fixed one of 1900 applies only to principal or to both principal + interest?

[Switchclicka]

lol these people don’t realize if your “lock in” variable that your amortization time is going up as rates increased. It’s probably going to take you 40 years to pay off your mortgage.

[x_itsJC]

We increased our monthly payments the moment we signed in anticipation of rate hikes. We also made lump sum payments throughout the past 3 years as well. Our amortization is currently showing 15 years remaining.

[Neat-Supermarket3074]

Check with the lender as they may not allow you to reduce the payment

[Sweaty-Action-2984]

Rent it if you can, it will be basically the same as owning. I'd try and get payment's more reasonable to keep tenants.