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Old 06-12-2018, 03:01 PM
 
Location: Boise, ID
7,965 posts, read 22,070,193 times
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Quote:
Originally Posted by Grumpty View Post
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.
True, but they wouldn't save as much in interest. For an extreme example, if you fully pay off the rest of your loan at loan year 29, you'll save maybe a few hundred dollars total in interest, because your balance is low and the monthly interest is only a few dollars a month, but if you pay off the loan fully in year 5, you could save hundreds of thousands in interest, because your balance is still high. Same goes, to a lesser extent, for making extra payments. You are paying the same rate, but on less principal, so less total interest over the life of the loan.

Same exact thing as with earning compound interest. If you invest your money at age 20 at 5%, you are earning 5%. If you invest it at age 40 at 5%, you are still making 5%, but it doesn't have as long to grow before you are going to retire. Same idea.
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Old 06-13-2018, 06:48 AM
 
244 posts, read 117,121 times
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Quote:
Originally Posted by Lacerta View Post
True, but they wouldn't save as much in interest. For an extreme example, if you fully pay off the rest of your loan at loan year 29, you'll save maybe a few hundred dollars total in interest, because your balance is low and the monthly interest is only a few dollars a month, but if you pay off the loan fully in year 5, you could save hundreds of thousands in interest, because your balance is still high. Same goes, to a lesser extent, for making extra payments. You are paying the same rate, but on less principal, so less total interest over the life of the loan.

Same exact thing as with earning compound interest. If you invest your money at age 20 at 5%, you are earning 5%. If you invest it at age 40 at 5%, you are still making 5%, but it doesn't have as long to grow before you are going to retire. Same idea.

You can't change the past.You can only affect the future. Whether someone is in the first year or last year of the mortgage it still comes down to a decision of is it worth it to invest X dollars at Y interest rate over the remaining life of the loan. The person at the end of the loan will save the same over the rest of their loan that the person at the beginning of the loan save in the same amount of time (given the same loan specifics). They then have the option to invest that money not spent which will compound just like the person at the beginning of their loan.


I have had people say to me that something is not worth it because the overall dollar amount is 'not much'. I usually respond with 'well, would you prefer that money stays in your pocket or goes to theirs?'.
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Old 06-19-2018, 12:30 PM
 
Location: Boise, ID
7,965 posts, read 22,070,193 times
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Quote:
Originally Posted by Grumpty View Post
You can't change the past.You can only affect the future. Whether someone is in the first year or last year of the mortgage it still comes down to a decision of is it worth it to invest X dollars at Y interest rate over the remaining life of the loan. The person at the end of the loan will save the same over the rest of their loan that the person at the beginning of the loan save in the same amount of time (given the same loan specifics). They then have the option to invest that money not spent which will compound just like the person at the beginning of their loan.


I have had people say to me that something is not worth it because the overall dollar amount is 'not much'. I usually respond with 'well, would you prefer that money stays in your pocket or goes to theirs?'.



I think we are agreeing on everything and just approaching it from two different directions. Nothing you said negates anything I said and vice versa. All I was saying is that if I had the chance to pay down the loan at some point, it is better to do it earlier than later.
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Old 06-20-2018, 01:12 PM
 
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Quote:
Originally Posted by Lacerta View Post
I think we are agreeing on everything and just approaching it from two different directions. Nothing you said negates anything I said and vice versa. All I was saying is that if I had the chance to pay down the loan at some point, it is better to do it earlier than later.

I think 'it is better to do it earlier than later' might be about the only place we are disagreeing. Personally if the rates are low, like the 4.5% proposed in the original post, then I am more likely to pay extra down late in the loan rather than early in the loan. I am willing to invest $5k short term at 4.5% but not very willing to do the same over say 29 years.


If the interest rate were say 12%? Then I would be much more likely to pay extra at the beginning of the loan.
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Old 06-21-2018, 09:54 AM
 
3,221 posts, read 1,829,593 times
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Quote:
Originally Posted by Grumpty View Post
I think 'it is better to do it earlier than later' might be about the only place we are disagreeing. Personally if the rates are low, like the 4.5% proposed in the original post, then I am more likely to pay extra down late in the loan rather than early in the loan. I am willing to invest $5k short term at 4.5% but not very willing to do the same over say 29 years.


If the interest rate were say 12%? Then I would be much more likely to pay extra at the beginning of the loan.
You have to compare the after tax benefit of the prepayment to get the real rate of return. To make it even more complex you would need to make an assumption of say what is your effective tax rate using the mortgage itemized deduction - effective tax rate at standard deduction.
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Old 06-22-2018, 10:06 AM
 
244 posts, read 117,121 times
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Quote:
Originally Posted by SWFL_Native View Post
You have to compare the after tax benefit of the prepayment to get the real rate of return. To make it even more complex you would need to make an assumption of say what is your effective tax rate using the mortgage itemized deduction - effective tax rate at standard deduction.


Yes, you should compare as closely as possible. To me investments that are taxed would be adjusted to what I get to keep if I am comparing that to saving after tax dollars such as with a mortgage. I'm still not willing to tie up that money, for that long of a period of time, at that rate of return whether you convert it before tax dollars or not.
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Old 06-23-2018, 01:04 PM
 
Location: 5,400 feet
1,965 posts, read 2,171,441 times
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Quote:
Originally Posted by SWFL_Native View Post
You have to compare the after tax benefit of the prepayment to get the real rate of return. To make it even more complex you would need to make an assumption of say what is your effective tax rate using the mortgage itemized deduction - effective tax rate at standard deduction.

True, but under the new tax law it's estimated that only 10-15% of taxpayers will itemize. So, unless one is in that group there should be no tax effect.


Another factor is opportunity cost. What might a person earn elsewhere by investing on the amount being used to pay down a loan principal.
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Old 06-27-2018, 05:38 AM
 
Location: Canada
2 posts, read 556 times
Reputation: 10
Every loan rate has change one year and its dependence on the new financial slab.
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Old 06-28-2018, 09:40 AM
 
244 posts, read 117,121 times
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What?
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