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Old 11-15-2009, 05:27 AM
 
Location: Vermont
5,441 posts, read 15,388,787 times
Reputation: 2641

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We are considering paying down our mortgage and I've used the mortgage-x.com calculator to calculate some things.

It is saying:
Total interest paid over the life of the loan (no pre-payment): $268,646.70
Total interest paid over the life of the loan (with pre-payment): $106,959.26

The thing I am pondering is, my pre-payment will be 13 years worth of $1000 a month, totaling $156,000, add this to the interest I am paying seen under "Total interest paid over the life of the loan (with pre-payment)" and we are basically at the same amount (minus 5k) as "Total interest paid over the life of the loan (no pre-payment)"

It seems odd to me thatby paying it off early I am paying the same amount of money ultimately? ...Even though I am paying it off 17 years early? Or am I miscalculating or misunderstanding?
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Old 11-15-2009, 05:35 AM
 
995 posts, read 3,681,063 times
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You are miscalculating.

The extra payment totaling $156k is not interest payment. It's the principal payment. If you add this amount to $106k, you also have to add the same amount to $268k to make the comparison.
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Old 11-15-2009, 05:48 AM
 
Location: Vermont
5,441 posts, read 15,388,787 times
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Sorry you're right. I was trying to look at the bottom line of what I will be paying out of my bank account in either scenario, but was not considering the other 17 years of mortgage payments I will not be spending (duh).
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Old 11-15-2009, 04:25 PM
 
Location: Planet Eaarth
8,955 posts, read 18,574,214 times
Reputation: 7193
Quote:
Originally Posted by joe moving View Post
We are considering paying down our mortgage and I've used the mortgage-x.com calculator to calculate some things.

It is saying:
Total interest paid over the life of the loan (no pre-payment): $268,646.70
Total interest paid over the life of the loan (with pre-payment): $106,959.26

The thing I am pondering is, my pre-payment will be 13 years worth of $1000 a month, totaling $156,000, add this to the interest I am paying seen under "Total interest paid over the life of the loan (with pre-payment)" and we are basically at the same amount (minus 5k) as "Total interest paid over the life of the loan (no pre-payment)"

It seems odd to me thatby paying it off early I am paying the same amount of money ultimately? ...Even though I am paying it off 17 years early? Or am I miscalculating or misunderstanding?
This bankers rule may help you understand why paying off early will benefit you. Rule of 78s - Wikipedia, the free encyclopedia

edit to add.........
http://www.powerofinterest.com/free/...t_ruleof78.htm
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Old 11-15-2009, 04:25 PM
 
4,010 posts, read 9,240,731 times
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I have paid my mortgage off by this method. It saves an enormous amount of money and not having a mortgage payment, i.e. owning your residence free and clear, gives you an economic freedom that most never experience.

There is a very simple way to look at this. The interest you pay for your loan each month is a very simple calculation. Take your interest rate, divide by 12, multiply by the outstanding balance that month. This is the amount of interest you owe for that month. Next month it will be a little less because your payment includes not only this interest but also a little towards the balance. Obviously your goal should be to reduce the balance as fast as you can because you no longer pay interest on it.

Some advice. Make sure that you check every month the bank actually credited the extra amount you send in against the balance and not some other part of the mortgage like just sticking in in escrow. If you get a monthly statement then it's easy to check. If you have a coupon book then you are going to need to either call in, or track it on a spreadsheet and match it up against their yearly settlement statement. In the years I did this I even took the extra step of writing a separate check and writing "xtra payment to principle" on it and then keeping a copy.
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Old 11-15-2009, 05:26 PM
 
339 posts, read 896,336 times
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Is it better to pay down the mortgage, or take the amount you pay in extra principle and invest it? For example, would it be better to pay an extra $500 in principle monthly, or take that $500 and invest it?
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Old 11-15-2009, 05:34 PM
 
975 posts, read 1,622,146 times
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Quote:
Originally Posted by FW transplant View Post
Is it better to pay down the mortgage, or take the amount you pay in extra principle and invest it? For example, would it be better to pay an extra $500 in principle monthly, or take that $500 and invest it?
This question seems to come up every week.

Theoretically it can be argued that it makes more sense to invest the difference. Practically speaking your better off paying down the mortgage and getting the guaranteed return.

My personal opinion is you should first save a year or two worth of living expenses then attack the mortgage.
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Old 11-15-2009, 05:50 PM
 
4,010 posts, read 9,240,731 times
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Quote:
Originally Posted by FW transplant View Post
Is it better to pay down the mortgage, or take the amount you pay in extra principle and invest it? For example, would it be better to pay an extra $500 in principle monthly, or take that $500 and invest it?
You have to do the math for your own situation. I've given the very simple calculation above. Can you beat that monthly savings with whatever investment you are considering?

The people who told me to do this over the years, that is invest my money instead of paying off the mortgage, are now crying at the horrors of stock market losses and having to make huge house payments. Me? I have a paid for house, money in savings and don't need to worry at all.
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Old 11-15-2009, 08:44 PM
 
Location: Maryland
1,534 posts, read 3,923,552 times
Reputation: 2308
Paying off the mortgage is my advice. Investing has many risks as I'm sure you know and having a major cost of living (housing) eliminated from your budget is really the best course. JMO
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Old 11-16-2009, 08:38 PM
 
Location: Denver, CO
2,282 posts, read 4,802,812 times
Reputation: 2515
Dave Ramsey seems to have a pretty practical method for this. He says:
1. Have $1000 emergency fund
2. Payoff all of your debts except the house (credit cards, student loans, cars, etc.)
3. Increase emergency fund to 3-6 months of expenses
4. Invest 15% of your income in growth stock mutual funds
5. Start throwing as much extra money at the house as you can to pay it off early
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