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What I'm asking is, why should one make extra payments on a mortgage every month, as opposed to keeping these funds somewhere else and then at some date in the future, making a large payment towards principle?
This for example:
Let's say that for the next 5 years I could/would pay an extra, say... $200 over my mortgage payment, to be applied toward principle... That is $12,000 over that five year period.
So what is the difference if I just put that into some other account (savings, etc.) and then at the END of that same five year period, put that $12,000 I have saved toward the principle in one large lump sum?
That's my plan for paying off my house early. It was sidetracked do to a disability last year but I intend to get back to work this year and start up. Since I had to quit my job last year my plan was pretty much proven as a good idea. I work an up and down seasonal job that rely's a lot on a good economy, weather and engine reliability, if that makes any sense. One blown motor at the wrong time or an active hurricane season can make me lose the busiest month of the year---or an illness.
I want to pay my house off early and looked at all the calculations as to when it would be payed off with extra payments. However, once those extra payments get payed into the principle that money is gone. If it is needed the only way to get access would be a HELOC. So I figure that I can take the same money and invest it. When the principle I owe on the house reaches what my investments have become I'll withdraw the funds and pay off the house. That way I would have that money accessible in the case of an emergency, such as loosing my job---which became reality last year.
The earlier you make your payments, then the less money you pay into interest. You would end up paying more in interest in the one lump sum (probably double the amount of interest of the monthly payment), but you would still come out ahead if you weren't making any extra payments at all.
What I'm asking is, why should one make extra payments on a mortgage every month, as opposed to keeping these funds somewhere else and then at some date in the future, making a large payment towards principle?
Because some people lack the discipline or can't make more than their interest rate with their cash in the bank. If you do decided to make a lump some payment, It just cost you your interest rate to hold onto the cash. At 4.5% in your case, that might add up to $1500 over 5 years. If you paid off $200 more a month, your balance would be $13478 lower versus $12,000 lower. This is a simplified version. If your rate is smaller than 4.5 then the difference is even smaller.
The earlier you make your payments, then the less money you pay into interest. You would end up paying more in interest in the one lump sum (probably double the amount of interest of the monthly payment), but you would still come out ahead if you weren't making any extra payments at all.
Could you please explain this in a bit more detail. Is there a calculator or website/article which covers this in laymen terms?
"You would end up paying more in interest in the one lump sum (probably double the amount of interest of the monthly payment)..."
For some reason I was under the impression that the difference you be be paying would be marginal? But I admit I am confused... ELI5? (explain like I'm five)
Because some people lack the discipline or can't make more than their interest rate with their cash in the bank. If you do decided to make a lump some payment, It just cost you your interest rate to hold onto the cash. At 4.5% in your case, that might add up to $1500 over 5 years. If you paid off $200 more a month, your balance would be $13478 lower versus $12,000 lower. This is a simplified version. If your rate is smaller than 4.5 then the difference is even smaller.
Sorry missed your post.. Thank You. I was thinking the difference would be even less than that... BTW, what loan amount are you using for this example?
Could you please explain this in a bit more detail. Is there a calculator or website/article which covers this in laymen terms?
For some reason I was under the impression that the difference you be be paying would be marginal? But I admit I am confused... ELI5? (explain like I'm five)
If you look at my numbers the difference marginal short term.
If a 5 year old could understand amortization people wouldn't get themselves in trouble, joking aside and I'll take on this challenge
Lets say you have a tree in the yard that you want to remove and throw away.( the loan balance) , you can only cut down and carry away a little bit each month. If you work harder you can cut down more and carry away more. When you cut the tree, it still grows a little, so you need to cut down more that it is grown every month to eventually get rid of it. If you cut down more of the tree each time, there is less of the tree, so it grows slower. You can cut down 10 feet for the tree now, or wait 20 years to Cut down that 10 feet of tree, plus everything else that grew on top of it.
I did the calculations using an amortization chart calculator that I found online. There is one on bankrate.com that is pretty decent if you want to calculate it with the same extra payments every month. I found a different one that was in an excel sheet that let me put in whatever amount I wanted for each month so I could see the real life situation. In the end, I decided to make the extra payments monthly rather than in a lump sum. It ended up saving me a whole year on payments, using the same amount of money.
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(explain like I'm five)
