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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.
The return is $2,250. Shifting the money from one pocket to the other pocket doesn't increase your return, you are just moving the saving from your "cash in the bank" to home equity. With $100,000 paid off early, how many months are you cutting off of your 30 years? Take that number multiply by your monthly payment and you have your total savings.
If you refinance to a new loan with the same rate end date with a $100,000 lower balance, you'll have a lower monthly payment. Do you consider the monthly savings difference in payment a "Return" on your $100,000? If you take that savings and pay down your mortgage faster, is it a double return?
Well, this would be home equity (which is real money) i would not have unless i made the mortgage payment. that's the whole point, you start accelerating the pace at which you actually own your home and, when you sell it, the dollars you keep in your pocket.
M
Well, this would be home equity (which is real money) i would not have unless i made the mortgage payment. that's the whole point, you start accelerating the pace at which you actually own your home and, when you sell it, the dollars you keep in your pocket.
M
Then your return is $106,225 and you found the money tree.
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?
Why are you starting another thread on this - we already have one (and many more from further back).
And as far as your math - it is wrong. You are counting the interest savings twice.
Well, this would be home equity (which is real money) i would not have unless i made the mortgage payment. that's the whole point, you start accelerating the pace at which you actually own your home and, when you sell it, the dollars you keep in your pocket.
M
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.
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%.
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.
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.
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%.
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.
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
Location: Prescott Valley,az summer/east valley Az winter
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most of you are making the mistake of only figuring interest per year. Now my story~ took $93,000. and put it down on house I bought previous year. After 2 1/2 more years my home was totally paid off. Now instead of looking forward to years of house payments I'm able to enjoy a retirement I wouldn't be able to fund if I had not paid home off. Considering what just happened to the stock market I'm glad I made that choice.
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