<p>Oops, my bad. H does the tax returns :)</p>
<p>"Are you saying if a person prepays his mortgage every month, the interest payments are still based on the original money borrowed? For example, I have a $300,000 mortgage. I pay off $30,000 of the principal 15 years early. Am I still paying interest going forward on the $300,000 amortized and not the $270,000?
So, in effect, by prepaying, I am raising my interest rate?"</p>
<p>No, you're not. Interest rate stays the same. Chocoholic is incorrect about the lack of benefits of prepaying the mortgage, and paying the regular set amount of mortgage interest and principle each month while "saving" the extra money in a saving account until you have enough to pay off the principal in full is not a good idea. Each time you add money to your payment to reduce the principal extra you HOP down the amortization schedule - so that your next payment has less interest and more principal.
If you want to check this out, go to an online mortgage calculator, and compare two loans with the same interest rate (one 15 year, and one 30 year.) Multiply the difference between the 15 and 30 year mortgage payment x 12 and see how many years it takes for that amount to equal the remaining principal balance of the thirty year mortgage. According to Chocoholic's logic, at the end of 15 years, the 15 year mortgage would be paid in full, and the owner of the 30-year mortgage would have saved enough to pay off the remaining principal balance of the mortgage.</p>
<p>chocoholic said "Unless you had a special arrangement, that I have never heard of, your lender will give you an amortization of the loan for the entire duration, and the monthly interest as calculated on the date of closing, while it goes down every month, based on your ever-reducing principal, will not change based on extra $$ you choose to put in."</p>
<p>The rate will not change, (and why would we want it to? Most of us locked in rates in the 5% range) but the interest amount will change depending on the amount of principal. And an amortization schedule shifts the percentage of interest to principal throughout the life of the loan on a set schedule - depending totally on the principal balance due. Being near the top of an amortization schedule is terrible - almost all the payment goes to interest. Which is WHY it is a great idea to add extra payments towards principal of the mortgage. Chocoholic, I think you are leading Dstark to incorrect conclusions.</p>
<p>Even if you are prepaying your interest, you still owe the monthly dollar amount that was contracted at the onset of the mortgage. What you are doing with the extra money is buying the time at the end of the morgage. You do not get a tax deduction for those payments as they are going towards the principal until the principal hits zero. What you are getting is not the interest rate of your mortgage on the money, as the savings is not realized until you are zeroed out, so you do need to make an adjustment on the interest you are getting over time. It is not all that simple. You are not saving the interest % of the mortgage THAT YEAR. You are saving it at the time the loan is paid off--making it a future value.Also since the principle is being reduced , the actual interest you are paying each month is reduced also so you get the same tax deduction for the mortgage as you would under a 15 year mortgage with the same terms. I really think that you can do better if you are disciplined enough to put the money away where you earn interest or investment growth that year. On a $100k mortgage for 30 years, you will owe $67,884 after 15 years. If you put away the difference each month at NO interest , you would have about $45720 tucked under the mattress. Could you earn $22164 in interest over 15 years on a monthly savings of $254 dollars? some of us can. To complicate things, you do have to pay taxes on the interest each year, unless it is an unrealized gain or stuck into a tax deferred plan. But you also have use of that money which you would not have, had you stuck it away in your mortgage. I know that we bought some investment rental properties about 6 years ago, and already, we have far exceeded the prevailing mortgage rates of that time.</p>
<p>OK, I'm going to weigh in, because I have just refinanced to a 15 year mortgage, to get the benefit of a fixed rate. (Refinancing from a 1st & 2nd mortgage, both with adjustable rates). </p>
<p>Since I've just been rate shopping, here is the big problem with comparing the 15 year to 30 year mortgage;
banks currently offer rates about half a point lower on 15 year mortgages than on 30 years. See: <a href="http://www.baltimoresun.com/business/realestate/bal-re.rates06feb06,1,693612.story?coll=bal-realestate-headlines-1&ctrack=1&cset=true%5B/url%5D">http://www.baltimoresun.com/business/realestate/bal-re.rates06feb06,1,693612.story?coll=bal-realestate-headlines-1&ctrack=1&cset=true</a>
[Freddie Mac's survey last week showed average rate on 30-year mortgage was 5.63 - whereas average rate on 15 year mortgage was 5.14.]</p>
<p>So lets go through anxiousmom's suggestion and work it out with a mortgage calculator, here:
<a href="http://www.hsh.com/calc-amort.html%5B/url%5D">http://www.hsh.com/calc-amort.html</a></p>
<p>We'll assume a 5% interest for the 15 year loan, 5.5% on the 30. $100,000 note.</p>
<p>On the 30 year loan, the payments are: $567.79
On the 30 year loan, the payments are: $ 790.79
The difference between payments are: $223
Add $223 to the mortgage each month on the 30 year loan - at the end of 15 years, you still owe, $7329.46. The interest paid over the life of the loan, with the prepayments, is $ 49,849.32. On the 15 year loan, total interest is $ 42,342.85.</p>
<p>Now - if you deposit the same $223 into a savings account that earns 3% interest for 15 years -- at the end of that time you will have $52,884.64 - but you will owe $69,489.72 on the balance of your 30 mortgage. - Your savings over 15 years aren't actually enough to pay off what you owe on the higher interest, 30 year loan, unless your savings have earned 6.3% interest over all those years - and that's a rather optimistic assumption in today's market. (Since you have to pay taxes on interest, you probably need an even higher rate of earnings to hit the breakeven point)
** Savings calculator: <a href="http://www.tcalc.com/tvwww.dll?Save%5B/url%5D">http://www.tcalc.com/tvwww.dll?Save</a></p>
<p>So basically, the assumption that you are better off saving the money than prepaying a 30 year mortgage is absolutely right -- and the same would hold true when refinancing IF the interest rates were the same .... but they AREN'T. There is no way to make up for the fact that you are able to negotiate a better rate with a 15 year loan. </p>
<hr>
<p>Which brings us to a second, hard fact of reality. If you are merely considering prepaying your existing fixed mortgage (rather than refinancing for a better rate), it is true that you will do better in the long run saving the money than prepaying the mortgage - if, as Jamimom says, you have the discipline to do it. How many of us do??? The bottom line is that at some point you find yourself sitting on a large chunk of money, and an emergency arises, or you are faced with a discretionary spending choice (like the one we keep discussing about elite private college vs. flagship state u.) .... </p>
<p>For those who do have the discipline ... I admire you. But I know I don't. What I will have is a house that is fully paid off by the time I am 66. </p>
<p>It comes back to what I said before: cash flow and long term planning. I can afford the payment for the refi ... yes, it would be nice to have more cash on hand ... but I don't need it to make ends meet. But who knows what I will be able to afford when I am 65? So I opt to make higher payments now, when I can afford them.</p>
<p>thanks for figuring, Calmom,
Actually, if you calculate this using 30-year mortgage at 5% (payment 536.82) and 15-year mortgage at the SAME 5% rate (payment 790.97), you get a difference of $253.97 a month. If you save it each month and get 5% interest (not figuring tax liability there) you end up saving $67883.37 in 15-years - which is the principal amount left on your 30 year mortgage. It's a wash. Add in the tax variables (what bracket you are in, whether you take a standard or itemized deductions, etc) and it's a tossup.
But, right now, my savings account is making less than .5% interest - and I'm probably one of those people who doesn't have the discipline (or desire) to invest wisely and hang onto that money. I go with Consumer Reports advice for retirement. Own your house. Work partime, Have a revenue stream. Maybe move to a lowercost state.
I'm prepaying my mortgage!</p>
<p>I would like to apologize to NJres for veerring the thread.</p>
<p>the lady in the article is unfortunate and I can certainly sympathize with her.</p>
<p>"[Now When I went to college, Things were different.]" I had some support from parents, but I also work during the summers and made some money to graduate without any loans." So What ! I also believe that the time I was at college was a complete waste of time and effort. I did not mortgage my mind, I sold my soul during the the fours years of college and subsequent 10 years for a career I really did not like. A mortgage can be paid. Selling a soul is something else. Perhaps the Lady is blaming the her loan situation for a mischosen career?</p>
<p>Having a mortgage (loan) paid off sometimes is a very risky endeavor. Perhaps having the ABILITY to pay off a loan is a better choice. </p>
<p>Example: Kids are out of school, loans are being rapidly paid off, mortgage is nearing full payoff. Your career has peaked and future income will be static or decreasing. DS is getting married, she has been wonderful, straight A in HS, magna cum laude, MS, career as teacher in great HS, She loves it. She's been discovered by a great gentleman. You want to give her a fabulous wedding. Really really fabulous because she's been the perfect child and deserves the best...You and H are very close to getting to retirement, you hate your JOB, you've been laidoff or job outsourced, eliminated, and you are doing pretty much grunt work. Cashflow is OK for current expenses. There are some health issues that you see in the future. Most of your wealth is tied up in IRA's and previous 401'ks, and home equity. </p>
<p>Q. Where are you going to find the money to pay for wedding? Remortgage the home?</p>
<p>Wedding?
second home maybe but I don't pay for weddings ;) I would never even dream of taking money away from equity for it, that is just crazy :eek:i</p>
<p>Often times the what we think is most conservative approach is alas the most aggressive alternative. </p>
<p>Example: Insurance. I'll save my money instead. I don't believe in insurance because its a bet, and I don't gamble. I don't need high coverage auto insurance because I've never had an accident. I never get sick. My parents and grandparents all lived to 90+. Besides I better use for the money to pay off the mortgage, or fund my IRA.</p>
<p>This thread is ridiculously confusing.
If I prepay $1,000, I will pay less in interest over the balance of the loan. True?
There are those on this BB that say this is untrue.
I have always thought the facts were closer to what Calmom states.</p>
<p>Itstoomuch "Having a mortgage (loan) paid off sometimes is a very risky endeavor. Perhaps having the ABILITY to pay off a loan is a better choice."</p>
<p>I agree that it is helpful to have some liquidity, but having a mortgage paid off is not a risky endeavor. It actual frees one up to make choices - like ditch that well-paying job and volunteer, or take a lower-paying job following your bliss.</p>
<p>Re: weddings. Hubby and I had a potluck outdoor wedding on a piece of property out in the country. People bought food, my parents paid for a kegs of beer and cake, hubby's parents sprung for table rental, sister made cotton dress, husband bought a pair of pants. Total cost of wedding - under $500. It was great. I would never borrow to pay for a wedding!!!!</p>
<p>Dstark asks "If I prepay $1,000, I will pay less in interest over the balance of the loan. True?</p>
<p>yes, Dstark. True. Calmom calculated the mortgage issue on page 4, and I recalculated it using exactly the same interest rates for a 15-year and 30-year mortgage and simple interest on a savings account.<br>
The question is "Is it the best use of your money, or can you actually make MORE money by investing the extra money you would put towards principal, in a different way?" Maybe some people can, but I prefer the sure thing. I save money by paying my mortgage off early, adding a little extra to each monthly payment.
HTH! :)</p>
<p>y'all are goin to have to stop by Federal Reserve Bank of Philiadelphia website.
Aint't gunna tell ya what to read. Yee all can't make speculations till the we solve the iragy war.</p>
<p>Besides we can't seen our offspring to callege and we ain't doing the same researchin.</p>
<p>Made you all think, didn't I.</p>
<p>now I better git to the honey dos so that I can ask for the honey dos.</p>
<p>Calmom: I agree with your basic rule of borrowing (borrow what you can expect to make as a starting salary), but, as a law student, I don't really agree with the low-end/high-end thing. If I'm not mistaken, someone who starts off in a DA's office will make about $25k/year - which almost no one putting himself through law school could afford. Compare Wall St firms of $125k/year. Obviously, few students will get those top jobs, so it's understandable that they shouldn't assume that they will. Anyway, my proposed modification: take the median salary of the law school you are attending.</p>
<p>I prefer the mortgage, especially at these bargain basement rates. You just never know if you can get the money out of the house, as the market conditions are not predictable, and it certainly is possible that the banks will shut down home equity and mortgages. Also they can add all kinds of fees and make it ornerous. Anyone who has gone through a nasty mortgage process knows exactly what I am talking about. If the money is sitting in an account somewhere, you can get the cash much more quickly and without knowtowing to some bankers. And if you have the money, you have the most flexibility. Houses are not always such liquid assets. My mother in law's house is in such bad shape that getting much out of that things is going to be a massive pain in the rear. I would prefer to hand it over to a bank for the a mortgage on it then have to deal with it as an asset. Property values can go down, the area can turn cold. And always at the worst possible time. If you have the money in the bank, you can always pay the mortgage.</p>
<p>Anxiousmom - that's precisely my point - it is the same IF the mortgages both have the same interest -- but at least in today's market, they don't come that way. Whatever is the best you can get on a 30 year mortgage, you can get half a point better on a 15 year mortgage -- and you CAN'T make up that half point on the same extra payment. </p>
<p>So as I said, if you just want to prepay your existing mortgage - then it is true, you are better off putting the money in the bank (if you are disciplined enough to hold on to it)... but if you are choosing a new mortgage, then you are going to do better going for the shortest term you can afford -- simply because the lenders are offering different rates. I don't know if this historically has always been true -- maybe when interest rates were falling, lenders were more eager to lock people into 30 year mortgages.... but in today's market, the shorter terms by definition also come with lower fixed rates. Another alternative might be to get a combination or hybrid loan - one with a fixed rate for a term of years, which reverts to adjustable -- with the intention of prepaying it before you get to the point where the rate could change -- I don't check those out, so I don't know whether you could get a better rate on a 30-year loan that way.</p>
<p>ariesathena, starting salaries for a deputy DA are more like about $35-$40K. I'm a law school grad and a lawyer. There are too many lawyers. That means it is is a highly competitive employment market. Even those DA jobs can be hard to get. The problem is that you don't know when you start where you will end up. You may have a better sense after your first year - when you see how you stack up against your fellow classmates, and whether you are able to land a higher paying summer clerkship than most. I mean, the reality is that you can borrow as if you are going to get the median, and go broke later on because you are stuck with the lower end salary because that's the only job you can get. It might be different if you have a clear idea of what you want to do and some extra, distinguishing skill - such as if you want to practice international law and are fluent in several languages. But for the typical law student.... the truth is that things can be very tough if you aren't in the top 10% of your class... or if you are, but don't aspire to work 80 hour weeks for something you don't believe in. (See istoomuch's post above about "selling your soul" ... there are a lot of idealistic youngsters in law school who would definitely consider work for the top wall street firms to be exactly that). </p>
<p>I agree with your comment that law students who aspire to be DA's and must put themselves through school can't afford it. In fact, I was talking to my son about that today - I asked him whether he was considering law school - as both his parents are lawyers -- and he said no, he wasn't going to be a lawyer. I said that was good, because even the public law schools in our state have priced themselves out of reach for anyone wanting to go into public interest law or government work. And that is simply very, very unfortunate -- because our society does need good lawyers in the public sector. When I went to law school, I paid $750 a year in tuition. My parents supported me, but at that rate they didn't have to -- I had more than enough in savings to cover my tuition. In fact, I told my parents that I would be able to support myself through law school, but they insisted on paying ... and I graciously accepted, knowing full well that it was well within their means to pay that amount. Of course the dollar was worth a lot less in those days -- I started law school in 1974 -- but $750 was still pretty darn cheap. Those days are long gone.</p>
<p>Mortgage calculators cannot take into account the extra $ that you put into a loan. Again you're assuming something that cannot be assumed.</p>
<p>another source: Fannie Mae and Freddie Mac websites. </p>
<p>Back to OP:
Have you noticed how PLUS and Stafford loans' conditions are explicitedly described and your comforming mortgage loan is implicitedly described. I sympathize but cannot feel sorry for her. The conditions of the loan was describe to her in great detail when she took the loan. If she didn't understand those conditions who is to be blamed. Should we (bank)forgive her loan and everybody (depositors and loan holders) take a proportional share of that debt. And if we allow one, will you allow me?</p>
<p>There are good reasons why you are allowed to consolidate your student or PLUS loan but once.</p>
<p>For those of us who have refinanced a mortgage. Do you really know what that refinance costs you? Hint-its alot more than than the closing costs, brokerage fees, hidden purchase fees.</p>