interesting article on mortgage prepayment

[ladykemma2]

Ask the Readers: Should I Invest or Prepay My Mortgage?

the first "expert" they list is frightening. get a 30 year mortgage and never pay it off. wow.

[Greebo]

The consensus is that there is no consensus.

[Ceashels]

Interesting article, though I wish he updated his findings instead of using the opinions of the "experts" from two years ago.

I wonder if having now gone through this recession and looking at a "double dip" factor if their opinions have changed?

[mek42]

First, sometimes I feel pleasantly alone when I read mortgage advice. Even before we knew who DR was or got serious about debt reduction, we knew what we could afford in a mortgage and bought a house with small enough mortgage that we don't itemize - our mortgage interest doesn't come close to the standard deduction. Even when I really cook the numbers, bordering on fraud if I were to file, we maybe get $200 or so more than the standard deduction. So, for me, tax concerns are completely irrelevant when thinking about the mortgage.

I wonder how the math works out to pay off the mortgage early and then apply the extra payments to investments. Then one could decide if the peace of mind of not having a mortgage payment was worth any premium that investing brought.

For that matter, do mortgage get re-amortized annually based on extra principal payments? If someone was making extra payment to pay off a 30 year mortgage in 15 years, but then something catastrophic happened to them after 5 years, would their mortgage paymeny be lower?

[Greebo]

I wonder how the math works out to pay off the mortgage early and then apply the extra payments to investments. Then one could decide if the peace of mind of not having a mortgage payment was worth any premium that investing brought.

I've done the math before but its been a while. As I recall, it depends on market rate of return and amount extra to invest but often the pay off early vs. invest works out better. In today's current flat DOW, paying off early DEFINITELY gives better return.

For that matter, do mortgage get re-amortized annually based on extra principal payments? If someone was making extra payment to pay off a 30 year mortgage in 15 years, but then something catastrophic happened to them after 5 years, would their mortgage paymeny be lower?

No, it's fixed for the life of the loan in the US.

[mek42]

...


No, it's fixed for the life of the loan in the US.

Now that I've thought about this more, doesn't the interest portion of the payment need to be adjusted periodically due to less principal than originally expected from which to charge interest?

[Greebo]

Now that I've thought about this more, doesn't the interest portion of the payment need to be adjusted periodically due to less principal than originally expected from which to charge interest?

A fixed rate mortgage has an amortization schedule, which, assuming you pay the payments exactly as scheduled, tells you at each payment how much P and I you will pay.

BUT - the interest is *actually* calculated based on the amount of the loan balance * the interest rate / 12.

So if you owe 100,000 and your payment is 1,000 a month and your interest rate is 6% that is half a percent a month.

$100,000 * 0.005 (1/2 percent) = $500 interest
Your payment was calculated at the onset as $1,000, so your principal portion will be $500. That lowers your prin balance to $99,500.

If you pay $1,100 instead, your prin bal goes down to 99,400, and your next months interest will be $497, so your $1,000 payment will be $503 in principle.

The PAYMENT never changes on a fixed rate mortgage. The length of time paying will go down as you pay extra.

If you want to change payment, however, you must renegotiate the loan.

[StanleyJohnson]

I think it's a good idea to pay down your mortgage only after you have 6 months expenses saved.

[cottageliving]

An interesting article, and the comments from readers were more useful than those from the so-called experts.

of course, the comments from the FVers were great as well.

thanks for sharing the article

[mndtrp]

I like to have peace of mind, so I am going for paying off the mortgage as soon as possible. I am still putting money into the 401k, have an emergency fund, and have no other debt, so the choice between the mortgage or further investing is what will give me the easiest life later on. My opinion is not having a mortgage will make my life easier.

[forHISglory]

We paid down the mortgage early, while also making investments. For us, the question was not mortgage vs. investments; which should I do? Our question was mortgage AND investments vs. other spending: which should I do. We chose to pare down everything else, and then invest in our IRAs and 403b's, as well as paying ahead on the mortgage. As a result, we had our house paid for in 5 years, and we had enough investments that we could retire early.

The answer is not always a neat package. What are the odds on the investment? What are the odds on the mortgage? What other expenses do you anticipate? Where can you get quick cash if you need it?

Thanks for the sharing the article; it makes me think!!

[scottp999]

I like to have peace of mind, so I am going for paying off the mortgage as soon as possible. I am still putting money into the 401k, have an emergency fund, and have no other debt, so the choice between the mortgage or further investing is what will give me the easiest life later on. My opinion is not having a mortgage will make my life easier.

Sounds great. I'm starting to accelerate mine. It's my last debt. Just sent in enought to get it down to 98,900. Breaking the 6 figure mark gives me lots of motivation.

I will feel much better with it paid off. I am still doing the 401lk, have a good emergency fund, and saving some cash and cash equivalents each month.

I really don't want any more debt in my personal life. I understand leverage, and would be much less adverse to using leverage in business, but I want to be done with it on the personal balance sheet.

Knowing that a banker has no claim will make me feel much better. Also, I am being realistic that if the layoff man comes knocking I will be lucky to find another job making 40-50% of what I make now and take a hit on benefits.

Who knows what lies ahead, but my current attitude to personal debt can be summed up with these quotes:

“While boasting of our noble deeds, we are careful to conceal the ugly fact that by our iniquitous money system we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery.”
-Horace Greely -1872


“Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal - that there is no human relation between master and slave.”
-Leo Tolstoy

"Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create money (deposits), and with the flick of the pen, they will create enough money, to buy it back again. However, take it away from them, and the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain slaves of Bankers, and pay the cost of your own slavery, let them continue to create money."
- Sir Josiah Stamp, (President of the Bank of England in the 1920´s, the second richest man in Britain)

[Telephus44]

I have always felt that this is a personal decision and it depends on what your financial goals are as well as risk tolerance. What really amazes me though, is that no one wants to pre-pay for only the first few years and then stop. I would think that since the first few years the payments are mostly interest any additional money you can put towards the principle saves a lot in total interest, but the total savings goes down the further along you are.

Honestly, that's my plan and I have yet to see any expert or even someone commenting on the internet mention it. We purchased our house with 10% down. We're paying extra on the principle - but only until we get to the magic 20%. After that, I'm going back to minimum payments. I figure with the amount that we're paying extra now, it will shave about 7 years off the length of the loan. But once we hit 20% and PMI is gone, then I plan on taking the extra $$ and using it for our next house (we plan on building a cave house in about 20 years and renting out our current house). I am also planning (warning - just my personal opinion) on a great amount of inflation coming, so pretty soon my mortgage payment will seem a lot cheaper. I'd rather pay it back with future dollars that are worth a lot less.

[StanleyJohnson]

telephus44 said
"I am also planning (warning - just my personal opinion) on a great amount of inflation coming, so pretty soon my mortgage payment will seem a lot cheaper. I'd rather pay it back with future dollars that are worth a lot less."

That worked in the 70's and may work again in the future.
I'm much more concerned with wage deflation. Because there is such a glut of workers in the world, it's hard for me to believe that wages will rise like they did in the 70's.

[scottp999]

I agree, delfaltion is the bigger threat. The total economy with not enough $ floating around to grab and pay your debts. The banks end up with all the assets. Even worse the government takes over housing completely and manages where eveyone gets to live.

"Here sir, your housing assignment".