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Old Yesterday, 03:01 PM
 
Location: Boise, ID
7,931 posts, read 21,741,360 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 Today, 06:48 AM
 
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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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