Any Bankers, Lenders, Financial wizzes out there?

[derekhonda]

Got a question, don't know if I am going to do anything about it but just wondering.

On a house loan, lets say $100,000.00 for 30 years at a 4.375%, your payment is 499.xx per month for P & I only. We will call this $500. Now let me give you 3 scenerios and ask you if one is better than the other.

Say you stumble across $2,000.00 that you did not need, and wanted to put it into your house.

1. Make your next month's payment at $2500. Your regular payment plus the additional money, all on this months card.

2. Rip out your next 5 cards, and pay 4 full months worth in advance, and then continually stay 4 months ahead. (like i'd pay june, july, aug, sept, and october - All in june, and then july 1st I'd send in my November payment, august 1st: decembers, etc)

3. Pay out the next 4 months with a 500 additional payment.

Now, while these all seem very similar to me I know that with compounding interest daily and early payments, they are not. So, what gives you the greatest good on that $2,000 ?

[Regular_Joe]

I think 1 and 2 are basically the same in the end since the $2500 was paid on the same date. Number 3 is different because the savings isn't happening at the same time. The difference is the interest charged on the 2000 difference for the first month, 1500 interest difference the second month, etc. Really this is barely anything with $2000 at that interest rate across only 4 months.

A thing for people to remember, its WAY more than applying an extra $2000 to the home loan. It really applying $2000 plus eliminating the interest on $2000 for the rest of the loan.

For example if you have that same loan and your 5 yrs in and have $80k left, paying an extra $2000 now saves lots of money. The interest on $2000 over 25yrs is actually $2187. So by paying $2000 now your eliminating paying that $2187 in interest in the end. Overall that works out to shaving off 8.5 months of payments.

Look at amortization tables to understand it better. On a $100k loan @ 4.375% interest by the time the 30 yrs is over you have paid back $100k PLUS $80k in interest. That is a total of $180k!!! If you take that loan and put an extra $2000 on the first payment, it actually saves you $5k and shaves off 14 months of payments.

Go to this website, plug in the numbers, and hit calculate, then go to the bottom to see a summary.
http://mortgage-x.com/calculators/extra_payment_calculator.asp

[initall]

I believe - when you pay the extra $2K you would want to send it as a sepaerate payment and note to take it off the principal balance.

If you send it in with the 4 coupons, you will be paying interest on them that way.

correct me if I am wrong.

[derekhonda]

I'll tell you my reasoning.

At first when I was thinking about this delemma, the decision sounded clear. Getting the extra $2000 to the bank as soon as possible had to be the clear winner. But then I was talking to a boss and a million dollar warehouse he owns (and is still paying for...) and he was talking about how many thousands of dollars he puts towards principal (and not interest) just by making the payments on the 15th of each month instead of the 1st of the next month.

So my thinking on sending in 5 months worth of payment and then constantly staying 4 months ahead is based on that logic. I think that sending in the 2k upfront recognizes you the savings immediately, but by staying 4 months ahead in your mortgage eventually it will catch up and surpass the savings on the first idea. I however cannot prove which is going to be the most fiscally smart way to approach the situation.

[Chino]

Originally posted by derekhonda
Got a question, don't know if I am going to do anything about it but just wondering.

On a house loan, lets say $100,000.00 for 30 years at a 4.375%, your payment is 499.xx per month for P & I only. We will call this $500. Now let me give you 3 scenerios and ask you if one is better than the other.

Say you stumble across $2,000.00 that you did not need, and wanted to put it into your house.

1. Make your next month's payment at $2500. Your regular payment plus the additional money, all on this months card.

2. Rip out your next 5 cards, and pay 4 full months worth in advance, and then continually stay 4 months ahead. (like i'd pay june, july, aug, sept, and october - All in june, and then july 1st I'd send in my November payment, august 1st: decembers, etc)

3. Pay out the next 4 months with a 500 additional payment.

Now, while these all seem very similar to me I know that with compounding interest daily and early payments, they are not. So, what gives you the greatest good on that $2,000 ?



for your current scenario not paying anything extra you would be paying a total of $179,291.57 on a 100,000 loan.

Scenario 1 and 2 would be the same end result and you would end up paying $173,291.57 for the 100,000 loan.

Scenario 3 you would be paying a total of 174,574.01 over the life of a 100,000 loan.

Like the one post said if you go to that website you can look at the ammortization table over the life of the loan and see the effect of each scenario on your payment and interest. Remember your paying more in interest at the beginning of a loan than at the end of a loan so you would rather do this sooner than later to have the best result.

[Regular_Joe]

You stop paying interest when any payment is entered into the system period. The sooner the money is entered, the sooner you start saving interest. By paying 2 weeks early he is saving the interest on that amount over 2 weeks. This isn't a huge thing, but with huge loans, and doing it consistently over years it can add up. Basically the more you can pay, and the sooner you can pay, the more you save.

This is why some people get into the bi-weekly payments (pay every 2 weeks). Your avoiding interest because your paying parts of the loan 2 weeks early. Plus that works out to an extra 2 payments a year (12 months/12 payments vs 52 weeks/26 payments). On the loan you mentioned, going to a bi-weekly payment plan would shave off 4.5 yrs worth of payments ....

[destey]

Lots of good info in this thread.

If its compounded daily, your interest for that day is derived from the total amount you owe and added onto your total. The principle is really only relevant at time of purchase. After that principle and interest get lumped together and you owe interest on all previous interest+princple. Its classic recurrence relation.

http://en.wikipedia.org/wiki/Recurrence_relation

[dustin_j]

Originally posted by derekhonda
I'll tell you my reasoning.

At first when I was thinking about this delemma, the decision sounded clear. Getting the extra $2000 to the bank as soon as possible had to be the clear winner. But then I was talking to a boss and a million dollar warehouse he owns (and is still paying for...) and he was talking about how many thousands of dollars he puts towards principal (and not interest) just by making the payments on the 15th of each month instead of the 1st of the next month.

So my thinking on sending in 5 months worth of payment and then constantly staying 4 months ahead is based on that logic. I think that sending in the 2k upfront recognizes you the savings immediately, but by staying 4 months ahead in your mortgage eventually it will catch up and surpass the savings on the first idea. I however cannot prove which is going to be the most fiscally smart way to approach the situation.

You are still better off putting the $2000 towards principal at one time. If you send in extra payments, you still pay interest on them (though you are shortening the time to gain interest). However, if you put $2000 toward principal, you no longer pay interest on that $2000.

Another way to look at it, the faster you are able to decrease the principal owed, the more your following payments will put towards principal rather than interest.