There are 2-3 threads going with pay down mortgage or investing... and when it "makes sense" to pay down mortgage.
All calculations were done with a spreadsheet downloaded from microsoft. I modified sheet, some, but all this could be done with standard sheet and somewhere to write down if then answers.
Issue #1, being debt free has a psychological value, and this post is not meant to demean, replace, or suggest what that value is.
Issue #2, paying down a mortgage is "risk free" rate of return. Whatever loan rate is (5%, 5.75%, 6%) is the lowest risk investment you have, assuming savings accounts, T Bills and other fixed income securities yield less than the interest rate on mortgage.
The numbers
100k mortgage, 6% interest rate. Payment is $599.55. First month is $99.55 principal and $500 interest. Total 30 yr interest payment is $115,838.19. Loan repyament period is 360 months (30 yr fixed).
Situation 1. pay extra $50 each month. Overall interest reduced to $91,268 (saved about 14k), repayment period shrunk to 295 months (saved 65 months*599.55=38970.75 of loan payments.
Total extra payment was 295*50=$14750.
situation cost $14750 over 295 months to save $63,540 over 65 months.
situation 2. Pay $100 extra per month for first 10 years. Overall interest reduced to $82,974.02 (saved $32864). Repayment period shrunk to 286 months (9 months shorter than above). Saved 74 months*599.55=$44,366.70 in payments.
Total extra payment was 120*100=$12,000 (2750 less than situation above).
situation cost $12000 over 120 months to save $77230 over 74 months.
Meaning the extra payments were fewer, cost you less out of pocket, and saved you more money. This is because these payments were applied eariler in loan period. Early repayments count more than later repayments.
situation 3. Person pays $200/month starting in year 20. overall interest paid is $109,846 (27k more than previous situation, 6k less than standard 30 yr fixed). repayment period shrunk to 323 months. This is nearly 40 months more than previous situation.
The extra payment in situation 3 was $16,800 (the highest of the 3 situations). Because the extra was paid at the end of the loan, it did not "compound" in reverse as much as lower payments applied earlier.
Pay down mortgage, or invest? Compounding in reverse.
March 6th, 2007 at 06:43 am
March 6th, 2007 at 07:27 am
March 6th, 2007 at 08:08 am
March 6th, 2007 at 08:48 am
March 6th, 2007 at 09:16 am
April 21st, 2008 at 02:16 am
June 29th, 2008 at 02:45 pm
continue paying extra on my home equity loan
August 17th, 2008 at 03:58 am
How do I know what formula to apply to my mortage? How much extra should I being paying to reduce my mortgage debt?
August 17th, 2008 at 07:00 am
I don't know the formula, but there are online calculators which can be used. On Microsoft's web site there are ammortization tables you can download (in excel format).
You plug in your interest rate, loan amount and period (15 year/30 year) and the spreadsheet will calculated every payment.
There is a spot on the spreadsheet for extra payments as well.
As to pay down the mortgage, or not, that is a personal decision. Right now I hold a 30 year fixed first at 5.75% which I am not paying down, and a 30 year fiexed second at 7.5% which paying down is on my list of things to do, but I have not started doing yet.
Make sure your emergency fund has 6 months expenses in it. Make sure you are setting aside 15% for retirement. Then consider paying down the mortgage.
September 1st, 2008 at 08:51 pm
March 16th, 2009 at 05:24 pm
March 21st, 2009 at 07:27 am
March 23rd, 2009 at 09:47 am
If using ACH, verify how extra funds are used (pay next month or pay down principal). I have not seen a bank ever do anything other than pay down principal, but there is a first time for everything.
April 10th, 2009 at 04:54 am
April 10th, 2009 at 07:11 am
I think your asking why the extra amount you pay over your scheduled payment is applied towards the Principal and not the Interest. Think of it this way, when you have a 200k loan at 6%, your interest payment for the first month would be $1000, but your scheduled loan payment is 1199 for 30 years. The "extra" 199 is applied towards principal, and now you owe 199,801. Now if you make a payment of 1500, your interest payment is still $1000 for the first month, so $500 will be applied to the principal, and now you will owe 199,500. The bank may let you chose to apply the extra amount to the next months payment, but basically you are just giving the bank an interest free loan for a month, and why would you want to do that?
May 19th, 2009 at 06:08 am
Or would it be better to make a regular payment and on the 15th make for princlple only?
Diane