Another question regarding paying down your mortgage...
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Another question regarding paying down your mortgage...
Posted by OnTheBrink on 10/5 at 8:36 am
I know the board is pretty split on paying off your mortgage or paying it off early. I am on the side of piece of mind by not having the payment. What am I missing in the example below that just happened to me:

Mortgage rate - 5.0%
Mortgage payment - $1,100 (OT poor)
Paid an additional $1,000 this month toward the principal

Our "Actual remaining term left" dropped 4 months. So, with that $1,000 principal payment, do I not automatically gain $4,400 over 30 years? And do I not gain 5.0% on that $1,000 over 30 years?

Not really trying to stir up the debate again, just trying to see if my train of thought is correct.




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Posted by wickowick on 10/5 at 8:39 am to OnTheBrink
quote:

Mortgage rate - 5.0%


Depending on how much time you have left on the mortgage and your credit score a refinance might be a very good option...



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Posted by OnTheBrink on 10/5 at 8:45 am to wickowick
quote:

refinance might be a very good option...


Been looking into that recently... Hopefully be able to do it around the beginning of the year, rates willing...



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Posted by TheHiddenFlask on 10/5 at 9:05 am to OnTheBrink
quote:

do I not automatically gain $4,400 over 30 years? And do I not gain 5.0% on that $1,000 over 30 years?


There is a big difference in today's dollars and dollars 30 years from now. It's a big point that a lot of people miss.

quote:

And do I not gain 5.0% on that $1,000 over 30 years


No. Not as long as mortgage interest is tax deductible.




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Posted by jguidroz on 10/5 at 9:29 am to OnTheBrink
Does that $1100 include taxes and insurance payments? If it includes taxes and insurance, your principal and interest payments from that $1100 are actually less.

Mortgages are also front end heavy on the interest, and paying more towards the principal of the mortgage only shortens the number of payments you have. It does not alter the amount of interest that is taken from your monthly payment each month as this is all pre-calculated, and the amount of interest you are paying in that last year on a 30 year mortgage is hardly anything. For example, say you took a 30 year mortgage at 5% on $100K. In the last year of that loan, you are only paying $171 in interest.

If you have Excel, there is a template for Mortgage Loan that you can plug numbers in and see what actual principal and interest payments are, and you can also add additional principal payments into the formula to see how it affects when the loan is paid off.



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Posted by OnTheBrink on 10/5 at 9:37 am to jguidroz
quote:

Does that $1100 include taxes and insurance payments?


Yes. I am only paying about $230 in principal now, per $1,100 mortgage payment.

My point was the extra $1,000 I put toward the principal knocked off 4 months in payments, seeing as how I am still early in my loan, saving $4,400 over the next 30 years.

quote:

TheHiddenFlask


Yeah, count me in those who miss that point. I have a hard time understanding inflation/deflation.



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Posted by foshizzle on 10/5 at 9:42 am to OnTheBrink
As others have pointed out, you should keep in mind that your 5% note is a pre-tax rate. If you were in the 25% tax bracket before the writeoff, then your real return is only 3/4 of 5%, or 4.25%.

It's useful when thinking about paying a mortgage to think of it as a return on investment. You are basically investing in a bond that pays you 4.25% interest. If you that is a good return, go for it. 4.25% guaranteed isn't bad but keep in mind we haven't subtracted inflation yet, if you believe (as many do) that inflation will go up anytime over the next couple of decades this may not be a good idea.

Personally, I am doing a refi right now for 30 years at 3.25%, and have no plans to prepay. For me, prepaying only gives me a 2.4% ROI, which is probably a negative real rate. No way in hell I am prepaying that puppy.



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Posted by jguidroz on 10/5 at 11:35 am to OnTheBrink
quote:

My point was the extra $1,000 I put toward the principal knocked off 4 months in payments, seeing as how I am still early in my loan, saving $4,400 over the next 30 years.


No, just no.

Open Excel and play with the mortgage calculator template.




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Posted by notiger1997 on 10/5 at 11:38 am to foshizzle
quote:

Personally, I am doing a refi right now for 30 years at 3.25%, and have no plans to prepay. For me, prepaying only gives me a 2.4% ROI, which is probably a negative real rate. No way in hell I am prepaying that puppy.


I just dropped off all of our paperwork an hour ago for a refi at the exact same rate as you. These rates are unreal. I have no intention of paying it off early either.



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Posted by OnTheBrink on 10/5 at 11:51 am to jguidroz
quote:

No, just no.


Really?

quote:

It does not alter the amount of interest that is taken from your monthly payment each month as this is all pre-calculated


For example:
$100,000 mortgage
By the time 30 years is up, assuming no extra payments, you pay around $200,000, principal and interest.

You're saying if you pay extra each month and pay the note off in 15 years, you will still end up paying the $100,000 interest? I did not think that was correct. If so, what would be the purpose of paying it off early?

*Numbers are not accurate, just used for sake of example.*



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Posted by lsufan112001 on 10/5 at 2:56 pm to OnTheBrink
Id refi. The grand u pay extra a year would help a lot in a 15 year refi., the bigger note but saving a ton on interest.


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Posted by Mercy Percy on 10/5 at 5:56 pm to lsufan112001
Man this poster is in the same situations as me. 1100 for 30 yrs at 5% but not a OT baller to pay am extra grand on principle. But I have my mortgage paid a head for 6 months. But I pay and extra 300 towards principle. I have been in home since 2009 and I am wondering if I should refi. And what wud happen w that cushion that I have created for paying ahead. Tia.


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Posted by Lou on 10/5 at 10:32 pm to OnTheBrink
quote:

Our "Actual remaining term left" dropped 4 months. So, with that $1,000 principal payment, do I not automatically gain $4,400 over 30 years?
Yes. You paid $1,000 now to avoid paying $4,400 later.
quote:

And do I not gain 5.0% on that $1,000 over 30 years?
The $1,000 you paid today will not be subject to the 5% interest over the remaining years left on the mortgage. So if you paid it on day one, yes, it would be 30 years.


However, there are other factors such as inflation and tax deductions (if you qualify). So those numbers do have an asterisk. But on the surface, your logic is correct. I would consider refi if I were you. Unless you are planning to have this one paid off in three years, a refi on 30 years at 5% is a no brainer with today's rates.





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Posted by Ric Flair on 10/5 at 11:04 pm to OnTheBrink
Another way to look at this is to ask yourself "if I bought this house 30 years ago and did the same, where would I be"? The Average house in 1982 was 80k, with an average mortgage payment of $ 300/month. At today's mortgage rate, an extra payment in the begining could save you $1200 at the end of the mortgage (2012). Remember that a gallon of gas was around a dollar in '82 (and even cheaper in the mid 90's). And if you invested the money in the S+P 500, you'd have made >2000% from October '82 to October '12.


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Posted by foshizzle on 10/5 at 11:16 pm to lsufan112001
quote:

Id refi. The grand u pay extra a year would help a lot in a 15 year refi., the bigger note but saving a ton on interest.


Definitely refi, but you aren't saving anything on 15 vs. 30.

If you have the cash to pay off the higher monthly payment that a 15 year requires consider that your ROI on the difference is ... about 1.5%. And that doesn't even account for inflation. That is incredibly poor.



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Posted by jguidroz on 10/6 at 6:38 am to OnTheBrink
Sigh. It helps if the mortgage calculator you are using recalculates interest. Glad I noticed this now.

Working with a good one now, on a $100K loan, paying an extra $1K towards principal would knock 4 payments off the end and save about $2K in interest over 30 years.

Say you wanted to turn that 30 year mortgage into a 15 year mortgage. On a $100K loan at 5%, paying an extra $255 a month would accomplish this. This would be roughly paying $46K extra over 15 years to save $51K in interest on the loan.

Doing it continuously over the course of years will save you some money. The better question is, could you earn more money investing that extra principal payment over 30 years vs putting it towards your mortgage to save on interest? With the low mortgage interest rates today, more than likely you will. Depending on how you invest it, you could also have immediate access to the cash for emergency purposes.

ETA: Changed mortgage calculators :banghead:


This post was edited on 10/6 at 8:34 am

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Posted by foshizzle on 10/6 at 11:26 am to jguidroz
quote:

The better question is, could you earn more money investing that extra principal payment over 30 years vs putting it towards your mortgage to save on interest?




Yes, paying extra does get you some but at today's rates it's only 2.5% or so after tax. Why lock up your money for many years at that rate, especially if inflation goes up at all?

Historically this was a good idea, b/c rates were higher. If you had a 6.5% note instead then it would be much more worth it. That would be a guaranteed 5% after-tax return, that's actually not bad. But today's rates are so it just isn't worth it.



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Posted by BestBanker on 10/6 at 11:41 am to OnTheBrink
What is missing here is the fact that you do not earn 5% on your money when you pay off a 5% mortgage note. You simply stop paying a note. The only way anyone earns money in this situation is to take the money and deposit in a 5% after-tax account.

Now run your calculation taking your extra payment at the time period you will make said payment at some earnings rate, while continuing to calculate your tax deduction dollar. This will give you a better understanding.



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Posted by Lou on 10/7 at 9:35 am to BestBanker
quote:

What is missing here is the fact that you do not earn 5% on your money when you pay off a 5% mortgage note.
If you don't spend the extra $1,000 today it gets hit at 5% for the next 30 years. So yes, that is a 5% gain in your favor.

quote:

Now run your calculation taking your extra payment at the time period you will make said payment at some earnings rate,
There is no question that in all likelihood you can invest $1000 today and over 30 years it will earn more than your mortgage rate. That is, he could earn 10% in the stock market on that $1,000 instead of 5% paid on the mortgage. No one is debating that.

But his premise is, he wants the peace of mind of not having a house payment, not - he wants to know what path to take to have the biggest pile of money in 30 years.




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Posted by TheHiddenFlask on 10/7 at 11:41 am to Lou
quote:

But his premise is, he wants the peace of mind of not having a house payment


That was not the premise, it was just something he mentioned, while asking about the actual numbers behind it.

We get it, you like Dave Ramsey. Can we stop the flaming now?



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