Low interest rates...

[EJB]

>>If I've missed the boat on this extra payment deal let me know.

Here is where I think you are missing the boat:

My understanding of the way it works is as follows:

Example: your mortgae is 100K at 6% interest. Using a 30 year schedule, your payment would be $599.95 per month. For your first payment $500 goes towards interest and 99.55 goes towards principal. (At 6% interst you owe 1/2% on the 100K = $500 interest that month).


Assuming no additional pincipal payment, in the second month, your principal has been reduced to 99,900.45 so the payment would still be $599.95 but in this month interest owed would be $499.50 and principal paid down would have been an additional $100.50.

If instead of making the $599.95 payment the first month, you had sent in an extra $500 with your payment, the interest owed the second month would have been $100,000-99.55-500 X 5%/12 = $497...a savings of $2.50 in interest the first month. You don't actually see the $2.50 savings (i.e. your payment is not reduced), but instead the money is applied to the outstanding principal.

So, the way I see it, even if you don't keep the mortgage to the end, you still save the money. If you end up selling your house in 5 years, all the interest you "saved" comes back to you in a larger check at the time the house sells.

[JohnMiller3]

<pre><font class="small">code:</font><hr>

30 Year Values

30 Year Loan Amount $100,000.00
Annual Interest Rate 4.900%
Loan Period in Years 30
Start Date of Loan 1/1/2000
Optional Extra Payments 0


Scheduled Monthly Payment $ 530.73
Scheduled Number of Payments 360
Actual Number of Payments 360
Total Early Payments $ -
Total Interest – 30 Years $ 91,061.62




15 Year Values
15 Year Loan Amount $100,000.00
Annual Interest Rate 4.900%
Loan Period in Years 15
Start Date of Loan 1/1/2000
Optional Extra Payments 0


Scheduled Monthly Payment $ 785.59
Scheduled Number of Payments 180
Actual Number of Payments 180
Total Early Payments $ -
Total Interest – 15 Years $ 41,406.96


30 Yr Extra Payments Values
30 Year Loan Amount $100,000.00
Annual Interest Rate 4.900%
Loan Period in Years 30
Start Date of Loan 1/1/2000
Optional Extra Payments each month 254.86


Scheduled Monthly Payment- $530.73 + 254.86= $ 785.59
Scheduled Number of Payments 360
Actual Number of Payments 181
Total Early Payments $ -
Total Interest – 15 Years Paid Off! $ 41,407.32

</pre><hr>

(On this loan example) Paying an extra $254.86 per month on a 30 year $100,000. mortgage @ 4.9 % will pay it off in 15 years…

You will Benefit greatly if you pay extra/over &amp; above your normal mortgage payment during the course of home ownership… even if you decide to Sell the home earlier than the normal mortgage maturity date… (unless the bank contract specifies differently)

[JohnMiller3]

<pre><font class="small">code:</font><hr>

15 Year Values
Loan Amount $100,000.00
Annual Interest Rate 4.900%
Loan Period in Years 15
Start Date of Loan 1/1/2004
Optional Extra Payments 0


Scheduled Monthly Payment $ 785.59
Scheduled Number of Payments 180
Actual Number of Payments 180
Total Early Payments $ -
Total Interest $ 41,406.96
(Pay off - Final Payment #180- 1/1/2019)



Accelerated 15 Year Values
Loan Amount $100,000.00
Annual Interest Rate 4.900%
Loan Period in Years 15
Start Date of Loan 1/1/2004
Optional Extra Payments 100.00


Scheduled Monthly Payment $ 885.59
Scheduled Number of Payments 180
Actual Number of Payments 152
Total Early Payments $ -
Total Interest $ 34,348.56
(Pay Off- Final Payment #152 9/1/2016)
</pre><hr>

As you can see, a 15 Year Mortgage with paying an extra $100. monthly - allows you to payoff the loan 29 months earlier… and save you an additional $7053.40 in interest…

[Bird]

</font><blockquote><font class="small">In reply to:</font><hr />
If I paid extra each month, my principal due was reduced, but the interest schedule was not modified to reflect my increased payment. Simply put, the bank still treated my 30 year loan as a 30 year loan and assessed interest on the expected principal balance, not the actual balance

[/ QUOTE ]

Assessing interest on the expected principal balance, not the actual balance? [img]/forums/images/icons/shocked.gif[/img] I never heard of such a thing and it's never happened to me. The interest was always calculated on the actual balance.

I've forgotten all the details of how it worked, but do recall some people (including some of my employees) who got stung by something called "the rule of 78s" in auto financing several years ago. Basically it worked so that after paying a couple of years, they still owed as much as, or even more than, the original principal because all the early payments went to interest, but that was only on auto financing; never a mortgage. I think even that has been outlawed now.

And while I think it's rare now-a-days, but apparently used to be common for mortgages to have a "prepayment penalty" clause. I bought a house in 1972 and sold it in 1977 that had such a clause. Mine was that I would owe 6 months interest, in addition to the principal balance, unless the new buyer financed the house with the same finance company (which they did).

[Pat]

AndyF, I wouldn't say you missed the boat explaining clearly your experience. Your explanation was clear, concise, and communicable. Like you, I too have very limited experience in buying and selling properties and hence in making loans for same. I guess we are like the blind men and the elephant, each with a firm grasp of one small part but ignorant of the whole.

My last residence should get me more credit for experience since it got refinanced multiple times. While you changed homes 3 times in 15 years, the shortest period I held a property was over 20 years and much of the time had multiple properties at the same time. I have no clue as to where in the world you are or were with your properties. My transactions were limited to a narrow section of SO CAL. I never had a mortgage such as you describe and I don't recall ever being offered one but I have slept since then so it is possible I may have had one offered.

If only mortgages of the sort you had were available, then some of my advice is probaably not a good fit. I should expect with rates as low as they currently are and the volume of paper being written, a good shopper should be able to do better than your previous experience as to the ability to pay against principal and lower the interest. One of the reasons I suspect this is that there is a competitive market with little "cushion" in the rates as interest is poised to start back up. Differentiating the mortgage product or offering incentives has to be done at least in part by other means than yet lower interest (not much margin to work on). Things that would be negotiable should include just about everything except significant cuts in rate. I should expect getting a loan with no payoff penalty and the ability to have interest calculated against the unpaid ballance would not be an unreasonable expectation.

//Disclaimer disclaimer disclaimer// [img]/forums/images/icons/wink.gif[/img]

Actual mileage may vary. Closed course, professional driver... Do not attempt to duplicate!

As to making significant money by putting it in the bank... I guess we'll have to disagree on some of that. Maybe we have a different view of SIGNIFICANT.

Liquidity not included, if you have money to invest and won't need to access it in the short term, there are lots of things that are better than any traditional bank account. Passbook? What a joke. Money market accnt, still chuckling. CDs, PULEASE! Any employer plan with some matching should be maxed out before going elsewhere. Next, consider Roth IRAs and the like. For decent security for the rate of return look at REITs. With a "proper" mortgage note, extra payments would save interest. Extra payments would net you a 6% return which is tough to beat in todays climate.

If someone has advice on how to make more than 6% with better security than investing in your own home, please chime in. (Again this assumes you aren't purposely buying property that is so marginal that it is highly likely to depreciate.)

Pat [img]/forums/images/icons/smile.gif[/img]

[EJB]

&gt;&gt;If someone has advice on how to make more than 6% with better security than investing in your own home, please chime in.

I don't think there exists such an animal...there is no place you can make 6% *guaranteed* that I am aware of...the whole country (or at least a good portion of it) seem to have forgotten the whole concept of paying off a mortgage and owning a house free and clear. As one that has done it, I can tell you, I doubt there is a much better feeling of security out there.

Beyond the 6% (or whatever the rate is), there is an incalculable amount of piece of mind that comes from *owning* your little piece of heaven...big piece, or little piece, it doesn't matter.

I know so many people that are 45-50-55 years old and have recently refinance or purchase homes with 30 year mortgages??? Who wants to still be paying off a mortgage when you are 80 years old?

In my mind, you want to own your house free and clear at the latest when you retire, if at all possible...and earlier is better still. Not many people even aim for this anymore, they just figure the mortgage as a lifetime expense.

(And I am not counting people that have no choice in the matter and live paycheck to paycheck...you gotta do what you gotta do to survive) but everyone I know that is over 45 that has recently signed up (or re-signed up) for a new 30 year mortgage, only did so so that they could have a bigger/fancier, more expensive house...not because they had to.)

[Pat]

EJB, Thanks for your comments. There for a while I was afraid I was a lone voice crying in the wilderness. I have only paid one mortgage out to completion (25 yr conventional with fixed rate) but it was a GOOD FEELING even though I was living in another mortgaged home by the time we had it paid out. Didn't get that one paid out but got enough equity out of it to buy my 160 acres and build a house with no financing involved.

...and now for a rambling comentary for anyone interested...

Essentially traded my equity in last house for 160 acres with new house free and clear (not finished building yet but fully funded.) It was a leveraged deal. We paid as much as we could to keep interests costs down, refinanced when appropriate, and did not have a new car after 1972 untill a year prior to selling and moving ($50K Dodge truck, '97 Cummins dually 1 ton with lots of customizing). Currently looking for mid sized SUV for wife probably a Subaru Forrester, 2004 model) Downgrading from standing seam metal roof to 50 year architectural shingles on new construction pays for over 1/2 of the Subaru. Rest can be extracted here and there, mostly from sweat equity on new house.

Since I took early retirement and a "hit" in monthly pay, it is good that I didn't "WASTE" a lot of money by doing unfavorably expensive mortgages along the way. It may not seem like a big deal, but over the decades the difference between paying more, throwing away money on high interest, points, poor clauses in contract, etc., adds up when compared to saving interest, compounding, and building more equity. Sure some of that is accelerated toward the backend of a contract but all of it isn't and that is all the more reason for long range planning.

Deferred gratification and compounded interest are wonderful tools if you can marshal the discipline required. Throwing away money on unfavorable real estate mortgage contracts instead of building equity doesn't seem to be a flashy "get rich quick" scheme but it can pay off later. Of course, you have to believe in later and not be of the school of instant gratification.

For example, if you are carrying a large credit card debt, but managing to keep the ballance from exceeding your limit, then you apparently have enough income to pay for all your purchases plus an exorbitant rate of interest. If you paid your card in full each month and deferred buying anything that is not truly an emergency that would put you beyond your ability to pay, you'd save all that interest. If you actually did "SAVE THAT INTEREST" you'd build up a fund that would let you buy what you would have bought with your card that would have not been paid at the end of the month. What a concept! You keep the interest!!!

By the way... Thanks to all those who pay finance charges on their credit cards, it keeps the credit card system working so that I can use it. I haven't paid a finance charge on a credit card in decades, yet 90% or more of my purchases are via credit card for convenience, airline miles, free bookeeping service, etc. All paid for by the folks who carry over a ballance. Again, THANKS! [img]/forums/images/icons/wink.gif[/img]

It wasn't all drudgery and no play time or fun. We lived on our sailboat for 9 years (not a sound financial move but a real fun chapter in our saga.) We had lots of fun sports cars but only one new one (165 MPH) designed by Shelby team. We had campers and took vacations, hiked Mexico, the Sierras, did white water by raft and canoe, flew private planes, hang glided, SCUBA dived, and was in the civilian volunteer arm of the US Coast Guard for 10 years doing ocean search and rescue and teaching public boating safety classes (our volunteer phase). So we didn't live like hermits, no "Walden Pond", just reasonable frugalness, considerable care in real estate mortgages, and scrupulous avoidance of credit card debt. We didn't really make all that much money but we sure didn't waste any more than absolutely unavoidable on interest. What others paid as interest we saved and invested in our mortgage.

I am some surprised and enheartened to see how many folks out here in the sticks put a lot of sweat equity into their own homes. Many buy the materials as they can manage, do what they can, and hire what they can't do for themselves. We have the luxury of hiring most of our labor. I put in maybe 25-35 hrs per week on average and not all of that is actual sweat equity.

Hope that if you did not find this "book" informative, it was amusing.

Pat
[img]/forums/images/icons/smile.gif[/img]

[Stoneheartfarm]

</font><blockquote><font class="small">In reply to:</font><hr />
This is true only if you stay in the home long enough to pay off the mortgage. If you sell in a few years, you've wasted every dollar you prepayed unless you were able to negotiate an immediate reduction in monthly payment. So think ahead, if you're sure you'll pay off the mortgage go ahead and pay extra every month. Otherwise, put the additional payment in the bank or other secure place and collect a few bucks interest on it.

[/ QUOTE ]

Huh? Not the way I was ever taught. Additional monies paid go against the outstanding debt, thereby reducing it. Therefore in a few years when you sell, you will have all of that additional equity that you didn't have to pay interest on and that has (hopefully) increased (appreciated) in value. If your interest rate is 6% and properties in your area appreciate 5% a year, sounds like a pretty good savings.

It seems like having the payment go down every month would result in paying more overall, but I haven't had time to figure that one out yet. How much does the payment go down? Is there a set percentage?

Steve