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tl;dr:
I have two amortized mortgages; one big and one small.
The conditions (interest rate and mortgage length) are exactly the same.
Which should I pay off first?


I have always heard that you should pay off the debt with the highest interest rate first, but in my case I have two mortgages with the exact same conditions (same interest rate and same length). Because of this, I have considered them just one debt, and therefore started to pay extra on the smallest loan. I thought it made no difference financially, but getting rid of one mortgage was a motivation. My logic was that every dollar I pay in early is a dollar I won't pay compound interest on later, and as every dollar has the same interest rate and pay-off length, there shouldn't be a difference which loan I put my dollar on.

However, I just started thinking, and because of the nature of amortized loans, I'm obviously paying quite a lot of interest in the beginning, which means that during the years I spend paying off the small loan, I'm paying a lot of interest and nearly nothing towards the principal on the big one. The loans are for 30 years, and I got them one year ago, so there's 29 years left.

The numbers in question:

  • $59,000, 5.4% annual interest rate, 29 years left
  • $270,000, 5.4% annual interest rate, 29 years left
  • I can pay off $500 extra per month

My calculations are (did some rounding and estimating, so not 100% exact):

Paying off the smallest loan first:

  • Smallest loan done after 7 years. Saved about $47,500.
  • At this point, there's $236,250 left of the big one. Start to pay extra on the big one.
  • Biggest loan done after 14 more years. Saved about $69,580 on this.
  • In total: Done after 21 years, saved $117,080.

Paying off the biggest loan first:

  • Biggest loan done after 17 years. Saved about $124,200.
  • At this point, there's $35,880 left of the small one. Start to pay extra on the small one.
  • Smallest loan done after 4 more years. Saved about $10,680 on this.
  • In total: Done after 21 years, saved $134,880.

Considering them as one loan of $329k:

  • Loan done after 18 years. Saved $135,890.

According to this, paying off the biggest one seems to be fairly close to just considering them as one loan. Close enough that the difference might just be down to my rounding errors. But the 3 year difference, while the total cost remains almost the same, puzzles me a bit.
And paying off the smallest one first seems to cost me about $18,000 compared to paying off the biggest one first. It might not seem like much over such a long time frame, but it averages to about $75 each and every month for the next 20 years, so that is actually a substantial amount in my eyes.

Have I messed up anywhere?
Is it really beneficial to pay off extra on the big mortgage? Or is it no difference, and I should stick to the small one for motivation?

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    I think your mistake is that you stop paying the first mortgage once it's paid off instead of applying that payment AND the $500 to the 2nd mortgage as well. These scenarios should be all the same.
    – Hilmar
    Nov 18, 2023 at 17:25
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    Yeah, if you are paying $1,530 on the big loan and $335 on the small loan that's $1,865. If you pay an extra $500 a month ($885) on the small loan and finish in 7 years, then you have to either a) start paying $1,530 + $885 = $2,415 on the big loan to keep the total payments the same or you have an extra $335 a month spending money for the next 14 years while you pay $1,530 + $500 = $2030 on the big loan. Nov 19, 2023 at 4:37
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    Make sure that the extra payment is applied to the principal directly. Otherwise there won't be any monetary advantage at all. Nov 19, 2023 at 14:08
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    Are the mortgages to the same property or different ones? If the latter, it won't necessarily change the payoff calculus, but there may be a psychological/worst-case-scenario-planning benefits of prioritizing one property (e.g. your primary residence) over another.
    – R.M.
    Nov 19, 2023 at 17:20
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    @genbatro $5 per month are a lot! It's $60 per year, which over 30 years means $1800. This "formality stuff" would cost you that much if you kept both mortgages for the full duration. So the bank said "Would you like to have the normal thing, that is, one mortgage, or would you rather have the joy of doubling the paperwork? That joy will cost you $1800. You are welcome!" You should contact them and tell them to waive the fee on the second mortgage, or merge them into a single one. I'm not sure it's possible at this point, but do ask them! Nov 20, 2023 at 14:53

3 Answers 3

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You haven't accounted for what happens when the small loan is completely paid off.

Seven years into the aggressive payoff schedule you need to shift all original principal and interest payment and the extra $500 to the larger loan. When you do that the different scenarios will almost equal each other. When I checked with a spreadsheet the delta was less than $200, but that was due to the extra payment resulted in a non-zero balances when trying to account for the last payment on a loan.

Because the length and the interest rate are the same for both loans the order doesn't matter from a money standpoint, though one disappears after 7 years so there is some psychological and paperwork benefit.

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    You are, of course, completely correct. Thank you! I just did the maths again, with the shift of the original payment upon completion, and got the expected result that it doesn't matter. Then I'll continue paying off the smaller loan first. :) Thanks again!
    – genbatro
    Nov 19, 2023 at 2:40
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    If there are per-loan account-keeping fees, it would make a difference to make the smaller loan disappear as soon as possible; conversely, if the loans have a "redraw" facility that you might need in an emergency, it would make sense to ensure you have a buffer in the second loan before closing the first one. Nov 19, 2023 at 6:21
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    As well as the psychological and paperwork impact, the simple fact that you no longer have to pay the smaller loan gives you more financial flexibility and resilience if your income falls in future. Nov 19, 2023 at 12:41
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    @JackAidley: I would also double-check the contracts. While the interest rate is 5.4% now, many loans have either fully variable rates or rates that become variable after a while (say, a decade). Once again, better to have few loans left if that happens. Nov 19, 2023 at 17:08
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    @genbatro: In that case, you get greater flexibility from paying off the smaller loan first. This means that in case of "accident" (be it rate climbing even higher, or income reduction) you're less likely to have a budget crisis: being unable to both pay the minimum on your loans and pay your living expenses. Nov 20, 2023 at 7:59
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However, I just started thinking, and because of the nature of amortized loans, I'm obviously paying quite a lot of interest in the beginning....

This is a common point of confusion, the portion of your payment that is interest is only larger at the beginning because your balance is higher. If you look at an amortization schedule you'll see that the monthly interest is the outstanding balance multiplied by the monthly rate (APR/12).

You were correct that you can think of them as one big loan. There seems to be a flaw in your math, likely you are not using the same total payment amount each month for the duration of each scenario.

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You already have two answers, I'll be the guy who go orthogonal: I suggest you consider to not repay any mortgages early.
If you do, there is an associated opportunity cost, of not investing the money used to repay the loans.
Instead, consider putting your cash into stocks or ETF that can return more interest than the loans. JL.Collins, would suggest you to aim for SP500 which got 7% average interests in the past 150 years, therefore more than your 5.4% from the mortgages.
According to Mister Money Mustache forum, you got 75 pages of a topic of discussion on the matter. And an associated later blogpost that suggests your mileage may vary.
There is a question of risk tolerance if your loans are fixed rate and you don't like capital exposure. That would depends on your personality. One tropism that you'll find is "Money now is worth more than money in the future", the banks nicely extended you loads of it, keep it. (which means your leverage is a gift, don't be allergic to it)

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    Although many people recommend to invest for retirement prior to paying off your mortgage (for many good reasons), this is not as simple as comparing average equity returns vs your stated mortgage interest rate. To wit, this is not a matter of "check the maths", it is also 'understand your own risk preferences'. I am downvoting because this answer underplays the level of consideration of personal goals, as personal finance is not black and white. Nov 21, 2023 at 15:06
  • @Grade'Eh'Bacon granted. Edited with less dramatic wording to reflect that.
    – v.oddou
    Nov 21, 2023 at 15:27
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    I think it's always worth weighing options, if OP's loans were at 3% then paying early would be a waste because CD's are returning more than that, at 5.4% investing vs paying early is more of a gamble. It sounds like OP has already decided they want to pay extra on the loans. It's also not an either-or, you can allocate a portion of your extra money to paying down debt faster and another portion to investing.
    – Hart CO
    Nov 21, 2023 at 15:50
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    7% average is probably less than 5.4% net of taxes. There's also the associated risk, which is only worthwhile if the returns are significantly higher.
    – Ben Voigt
    Nov 21, 2023 at 15:50
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    This advice would have been more reasonable 4 or 5 years ago when interest rates were at record lows. OP has variable rate loans that have already climbed over 5%. I think OP's approach of aggressively eliminating high interest loans makes good sense.
    – codeMonkey
    Nov 21, 2023 at 16:43

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