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Home equity is not real money, it is like a non dividend stocks where you don't get a return until you sell it. Then if you want to borrow money against your property using a HELOC, you'll have to pay interest. The maximum amount you can save on prepaying the loan, is the interest rate. Period. You can play mind games and compound that savings over 30 years. If that is the case, you might as well pay discount points.
Uh, no. The savings ARE compounded, because each year, the savings mean more of your payment goes to principal. The lower loan balance means a lower interest expense the next year.
The interest cost of a mortgage is based on the outstanding principal. The lower the outstanding principal, the lower the interest cost.
If you pay down the mortgage by $100,000 and the rate is 3%, then the next year your balance will be lower by $103,000 due to both the overpayment itself and the saved interest. Then you are saving the interest on 3% of $103,000....or $3,090. So after another year the balance is lower than schedule by $106,090. This is made of $100,000 in original paydown, $6,000 in saved interest on the paydown and the $90 remaining is the saved interest on the saved interest.
And so on.
(note: With monthly compounding, the amounts here will be a bit off but this suffices for illustrative purposes).
Quote:
Originally Posted by thelopez2
Lets say you take home $100,000 and you put it in the bank. Now you want want to do $100,000 in improvements. You take that $100,000 and pay the $100,000 bill and left with $0.
If you put that $100,000 into your mortgage, then use the HELOC to pay $100,000, you now have $100,000 balance at lets say 5%. How long will it take you to save up another $100,000 to repay that credit line, in the mean time you have a variable rate of 5%.
I don't think anyone here is suggesting to use your cash to pay down the mortgage if you're about to spend that amount on improvements - this is a big straw man. I agree, of course if you have big renovations coming up, keep the money liquid.
Quote:
Originally Posted by thelopez2
This doesn't even take into account your equity disappearing as your neighbors lose their jobs and homes go into foreclosure again. Cash doesn't disappear out of your pocket, at least to FDIC limits, like it can in a house.
If you don't pay down the mortgage, it will still disappear. Then you will have less equity than none at all, because you had none.....and then lost a lot.
The savings from paying a large amount or entire amount of your mortgage isn't simply the stated interest rate because that rate is an annual charge. At the very least you'd save that rate more than once on some if not the majority of the 100k
That's why I said compound.
If I go get a $100,000 personal loan at 10% then immediately repay it, did I just make a 10% return on my payback. Since I no longer have to pay back the $100,000 am I making 10% for the rest of my life?
If I go get a $100,000 personal loan at 10% then immediately repay it, did I just make a 10% return on my payback. Since I no longer have to pay back the $100,000 am I making 10% for the rest of my life?
I didn't say anything about a return, I said savings.
So I have been debating for several weeks whether I should pay a big chunk of cash into my mortgage principal... all the forums here have folks on each side of the debate. So I went to my amortization table and here is the best way to think about this issue PERIOD. Please check my logic and tell me what am I missing and let the debate begin:
I have a big mortgage... If I pay $100k today towards principal, instead of paying $23k in interest after 12 months, I will have paid $20k... that's $3k in interest that I didn't pay, money I didn't waste. Thanks to being able to deduct interest on my tax return, my tax bill will be reduced by roughly 25% of the $3k, so my real savings - money not sent down the drain - went from $3k to $2,250, but i still come out ahead.
In addition, after paying said big chunck, $100k, instead of paying $12k towards principal, after 12 months I will have contributed $16k. So that's $4k more of net worth, shifting money from one pocket to another.
SO adding the $2,250 plus the $4k, my return on the $100k paid on my mortgage is 6.25% the first year. This I much better than the 3.625% interest rate i am paying on my mortgage.
Two sides of the equation, need to be additive to one another.
What am i missing?
You might want to call the mortgage co and see if you can reset the terms of the mortgage. Lower monthly payment and interest rate for your 100,000 payment.
Uh, no. The savings ARE compounded, because each year, the savings mean more of your payment goes to principal. The lower loan balance means a lower interest expense the next year.
The interest cost of a mortgage is based on the outstanding principal. The lower the outstanding principal, the lower the interest cost.
If you pay down the mortgage by $100,000 and the rate is 3%, then the next year your balance will be lower by $103,000 due to both the overpayment itself and the saved interest. Then you are saving the interest on 3% of $103,000....or $3,090. So after another year the balance is lower than schedule by $106,090. This is made of $100,000 in original paydown, $6,000 in saved interest on the paydown and the $90 remaining is the saved interest on the saved interest.
And so on.
(note: With monthly compounding, the amounts here will be a bit off but this suffices for illustrative purposes).
I don't think anyone here is suggesting to use your cash to pay down the mortgage if you're about to spend that amount on improvements - this is a big straw man. I agree, of course if you have big renovations coming up, keep the money liquid.
If you don't pay down the mortgage, it will still disappear. Then you will have less equity than none at all, because you had none.....and then lost a lot.
I did say compound
Rate by definition is over a year, so when I said you'll save that rate, you'll be saving that rate year over year. So if the op paid $100,000 on a 3% loan early how long does that rate of return last, or compound, an eternity? They are trying to count the extra money now doing towards principal as a return, it is a mind game. Which they stated from title "The best way to think ...."
"Big Straw man" you are yet to own a house, LIFE HAPPENS, I use the renovation just an realistic example. Do you have any idea the cost to raise a kid or three? Ask your parents? Twins, job relocation? medical, childcare? My point is equity is not cash as the OP has stated and equity can only secure debt with interest. Change the numbers and scenario how you fell is more appropriate. Maybe 5 years from now they'll want to by a $40k mini van. Use your imagination rather than cop-out the straw man rebuttal.
Rate by definition is over a year, so when I said you'll save that rate, you'll be saving that rate year over year. So if the op paid $100,000 on a 3% loan early how long does that rate of return last, or compound, an eternity? They are trying to count the extra money now doing towards principal as a return, it is a mind game. Which they stated from title "The best way to think ...."
"Big Straw man" you are yet to own a house, LIFE HAPPENS, I use the renovation just an realistic example. Do you have any idea the cost to raise a kid or three? Ask your parents? Twins, job relocation? medical, childcare? My point is equity is not cash as the OP has stated and equity can only secure debt with interest. Change the numbers and scenario how you fell is more appropriate. Maybe 5 years from now they'll want to by a $40k mini van. Use your imagination rather than cop-out the straw man rebuttal.
Ok, so you save a cash reserve and then pay down the mortgage. Wow, that was hard.
Really need to make that a recast is going to make sense...
Quote:
Originally Posted by newnewyorkers
So I have been debating for several weeks whether I should pay a big chunk of cash into my mortgage principal... all the forums here have folks on each side of the debate. So I went to my amortization table and here is the best way to think about this issue PERIOD. Please check my logic and tell me what am I missing and let the debate begin:
I have a big mortgage... If I pay $100k today towards principal, instead of paying $23k in interest after 12 months, I will have paid $20k... that's $3k in interest that I didn't pay, money I didn't waste. Thanks to being able to deduct interest on my tax return, my tax bill will be reduced by roughly 25% of the $3k, so my real savings - money not sent down the drain - went from $3k to $2,250, but i still come out ahead.
In addition, after paying said big chunck, $100k, instead of paying $12k towards principal, after 12 months I will have contributed $16k. So that's $4k more of net worth, shifting money from one pocket to another.
SO adding the $2,250 plus the $4k, my return on the $100k paid on my mortgage is 6.25% the first year. This I much better than the 3.625% interest rate i am paying on my mortgage.
Two sides of the equation, need to be additive to one another.
Despite the goofy cartoony characters on this page, there is an honest-to-goodness re-amortization calculator that should eliminate any doubt about the different payments IF recasting is allowed by the lender -- Mortgage Recast Calculator to Calculate Reduced Payment Savings
Despite the goofy cartoony characters on this page, there is an honest-to-goodness re-amortization calculator that should eliminate any doubt about the different payments IF recasting is allowed by the lender -- Mortgage Recast Calculator to Calculate Reduced Payment Savings
If the corporate bonds are paying 3.75% and the mortgage costs 3.625%, we are talking a 0.125% spread. Even AAA corporate bonds are not without risk - strong-seeming companies can, and do, fail from time to time. If the failure rate is even 1 in 800 corporations more than normal - your 0.125% is wiped out, and you have nothing to show for your leverage "strategy".
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Really need to make that a recast is going to make sense...
