The perfect MP3 player
Grant Robinson
santiago at mr-r.net
Mon Sep 19 10:53:02 MDT 2005
On Sep 19, 2005, at 9:51 AM, Chris Strieby wrote:
> On 9/18/05, Grant Shipley <gshipley at gmail.com> wrote:
>> I am not a big fan of paying extra on my house every month. Lets say
>> a house payment was 1000.00 a month but you had 1500.00 a month you
>> can spend on a house. Wouldn't it be better to pay the 1000.00 and
>> put the other 500.00 in a savings account? At the end of three years
>> you would have made your house payments and 18000k in a savings
>> account. Then, when you lose you job, you can make your house payment
>> for 18 months (while looking for work) as opposed to owing a little
>> less but not having the money to make payments with the possibility of
>> losing your home. When you have enough in your savings account to pay
>> off your home, do it then.
>
<snip>
> Working from the example you've given of having a $1000 dollar monthly
> mortgage payment and being able to pay $1500 toward it, you'd save
> approximately $100,000 in interest over the life of your loan and
> you'd pay the loan off in about 15 years. If you're interested I have
> more exact figures I could give. For reference I was figuring a
> 30-year $200,000 loan with a 5% interest rate. If the interest rate
> were higher, you'd save even more.
The mortgage calculator I was using puts that loan at $1073 a month
P&I, but for the sake of argument, let's just assume that works out to
be $1000 a month. Now, lets assume you take that $500 a month
pre-payment, and invest it instead. Let's assume a modest growth rate
of 10%, over the life of the loan (which now is ~15 years). At the end
of 15 years, if you invest $500 a month earning 10% a year, your
investment will be worth ~$210,000.00
At the end of 15 years, you could then pay off your house, and have
~$85,000.00 left over, whereas pre-paying $500 a month on a 5% interest
loan leaves you with a paid-off house and nothing else.
The key is to look at the interest rate of the loan, what it shortens
your loan term to, and what you can make on investments. If your loan
interest rate is 25%, pre-paying $500 a month takes the term of your
loan down by a whopping 21 years, making the "invest $500 a month" at
even a big 30% annual rate not nearly as attractive, as you would save
almost $1,000,000.00 in interest, but only make $200,000.00 in
investing. In todays market, I would choose invest over pre-payment,
but that is only if your interest rate is low _and_ fixed.
Grant
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