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Old 06-10-2018, 07:49 AM
 
Location: Kansas City North
3,605 posts, read 6,695,641 times
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Years ago, pre-internet and computers,a caller to a financial advice show asked how to best (simplest) pay additional principal on a mortgage. The answer was to get an amortization schedule and start with the principal payment due on payment #360, and pay that. Then cross off that payment. Next make a payment of the principal due on payment #329, cross it off. Rinse and repeat. As you go up the schedule, the principal payments get smaller and smaller. If you have a big lump sum, you can cross off several payments at once. I think this is what the bank meant by “taking it off the back end of the loan.”
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Old 06-10-2018, 08:15 AM
 
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Quote:
Originally Posted by Okey Dokie View Post
Years ago, pre-internet and computers,a caller to a financial advice show asked how to best (simplest) pay additional principal on a mortgage. The answer was to get an amortization schedule and start with the principal payment due on payment #360, and pay that. Then cross off that payment. Next make a payment of the principal due on payment #329, cross it off. Rinse and repeat. As you go up the schedule, the principal payments get smaller and smaller. If you have a big lump sum, you can cross off several payments at once. I think this is what the bank meant by “taking it off the back end of the loan.”
It doesn't really mean anything , it just takes off the total you owe to pay off your mortgage (the back end) . You always pay more interest and less principal first on a mortgage.

You can pay $50 or $100 more a month and it has the same effect of saving in the interest you paid.

Say you could not afford to put down 20% and you put down 3%. If later you come into some money you can pay the other 17% and save yourself interest over the years. The only difference is if you pay 20% down at first you automatically save the interest and have a lower payment. Paying extra does not reduce the monthly payment amount. It only reduces the overall interest you pay and shorten how long you have to pay the mortgage for.

Let's say you owe $100K on a mortgage. if you pay $1000 extra a month that's (100) 8.3 years of payment. Of course it may take a little longer because you have to make your regular PITI payment plus the $1K, and most of those early payments are interest. Also you have to do calculations and see if the tax deduction savings are worth paying off your mortgage quicker. But once you pay off your home you only have your property taxes and homeowner's insurance to pay once a year, and you have extra money to pay bills or invest.

So you have to decide if paying $100k in about 10 years is worth more than paying $200K in principal and interest over 30 years.
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Old 06-11-2018, 12:27 PM
 
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From my perspective it was a way to start a baseline ROI calculation for a lump sum payment into my mortgage vs other investment opportunities.

After further consideration a $5k pre-payment is likely not an effective use of funds compared to alternative investment methods. The 4.5% has to be multiplied 1-effective tax rate to get your true annual return. This investment opportunity then becomes similar to a 30 year bond but would be risk free (in terms of there is no corporation to default). The issue is that the long-run return is implied as long as you stay in your home and therefore the investment principal is highly ill-liquid.

I will be able to find many other alternative opportunities at this rate that are superior and liquid. As the APR rises on mortgages this will become a more intriguing opportunity.
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Old 06-11-2018, 01:14 PM
 
244 posts, read 123,245 times
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Originally Posted by SWFL_Native View Post
From my perspective it was a way to start a baseline ROI calculation for a lump sum payment into my mortgage vs other investment opportunities.

After further consideration a $5k pre-payment is likely not an effective use of funds compared to alternative investment methods. The 4.5% has to be multiplied 1-effective tax rate to get your true annual return. This investment opportunity then becomes similar to a 30 year bond but would be risk free (in terms of there is no corporation to default). The issue is that the long-run return is implied as long as you stay in your home and therefore the investment principal is highly ill-liquid.

I will be able to find many other alternative opportunities at this rate that are superior and liquid. As the APR rises on mortgages this will become a more intriguing opportunity.

Yes, at a low interest rate it makes sense if you need the warm and fuzzy feeling of having the home paid off as soon as possible. Otherwise you are likely better off investing elsewhere but of course it is not foolproof. When interest rates get higher putting down larger chunks and paying off the loan ASAP starts to make more financial sense.
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Old 06-11-2018, 01:37 PM
 
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Originally Posted by Grumpty View Post
Yes, at a low interest rate it makes sense if you need the warm and fuzzy feeling of having the home paid off as soon as possible. Otherwise you are likely better off investing elsewhere but of course it is not foolproof. When interest rates get higher putting down larger chunks and paying off the loan ASAP starts to make more financial sense.
and if you wait too long and paid most of the interest off you may as well not pay off your loan any quicker.
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Old 06-11-2018, 10:06 PM
 
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Originally Posted by LifeIsGood01 View Post
and if you wait too long and paid most of the interest off you may as well not pay off your loan any quicker.

Huh? what difference does it make how long you wait? On a fixed interest loan it doesn't matter if you make an extra principal payment on the 1st payment or the 350th payment. The rate of return won't change.
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Old 06-12-2018, 05:36 AM
 
10,218 posts, read 6,360,779 times
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Originally Posted by Grumpty View Post
Huh? what difference does it make how long you wait? On a fixed interest loan it doesn't matter if you make an extra principal payment on the 1st payment or the 350th payment. The rate of return won't change.
Extra Payments Are More Valuable Early On
You get more value out of extra mortgage payments
Early in the loan term
Because knocking down the outstanding balance earlier
Means less interest accrues
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Old 06-12-2018, 08:49 AM
 
3,361 posts, read 1,919,376 times
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Originally Posted by Grumpty View Post
Huh? what difference does it make how long you wait? On a fixed interest loan it doesn't matter if you make an extra principal payment on the 1st payment or the 350th payment. The rate of return won't change.
https://www.mortgagecalculator.org/c...r-mortgage.php

bang in a few mortgage scenarios here and look at the amortization schedule. Also note the proportion of Principal vs interest especially from year 1 to 30. Then compare a 15 year vs a 30 year mortgage to see how much difference is there in year one especially as the principal as a % of overall payment.
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Old 06-12-2018, 08:55 AM
 
244 posts, read 123,245 times
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Quote:
Originally Posted by LifeIsGood01 View Post
Extra Payments Are More Valuable Early On
You get more value out of extra mortgage payments
Early in the loan term
Because knocking down the outstanding balance earlier
Means less interest accrues

The amount of time the money is locked in changes not the rate of return. A person at the end of their loan would get the same rate of return as the person at the beginning of the their loan.
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Old 06-12-2018, 11:31 AM
 
Location: Mexifornia
890 posts, read 725,547 times
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Play around with these calculators and see if it's worth it to make extra payments on the mortgage or invest long term in the stock market.


https://www.bankrate.com/calculators...alculator.aspx


https://www.bankrate.com/calculators...alculator.aspx


30 year S&P 500 returns impressive - Business Insider


30 year S&P 500 return "1986-2016: +9.99%"
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