Defraying principal with additional payments......

 One is often encouraged to pay off as much of the principal on a
regular basis if the objective is to pay off a mortgage as soon as
possible. However, say you normally pay an extra $300.00 towards the
principal on a monthly basis, wouldn't it be better to invest that
$300.00 per month (even in a basic savings account) then pay against
the principal in a lump sum later on?

In other words, wouldn't it be better to pay say $3600.00 at the end
of the year than paying $300.00 each month? Isn't your required
monthly mortage payment based on the original loan/principal amount
and doesn't change regardless of principal balance?

Thanks.

 
Not unless your investment makes a higher return than your
mortgage's interest rate.


Why do you think this would be better?  You seem to be making
some sort of underlying assumption about why this would be
better that I just don't understand.

When you pay off principal over and above your required
monthly payment, you immediately stop getting charged
interest on the extra principal you've paid off.  If you've
got the money, and if it's making a lower rate of return in
your hands than your mortgage rate, then why wouldn't you
want to put it into the mortgage as soon as possible?


Yes, but so what?  As your principal decreases, the
proportion of principal to interest in each of your payments
increases as well.  Paying off principal in advance means
paying less interest, and more principal, in every subsequent
payment, and hence paying off the mortgage sooner.

A tangential note... Given how low mortgage rates are right
now, if you don't have a low mortgage rate, and your mortgage
won't be paid off for a while, you should seriously consider
refinancing.  And if you DO have a low mortgage rate, you
should seriously consider that it may NOT be a good idea to
pay ahead, especially if you can foresee the possibility of
major expenses in the near future (e.g., new car, renovations,
private school tuition, college tuition, etc.).  Once you've
paid off extra principal, you can't get that money back
without refinancing or borrowing from a home equity line at a
significantly higher rate, so if there's a good chance you're
going to need the money before the mortgage is paid off, you
just might want to hold off on those extra payments.

--
http://www.jews4obama.com/

 I think I can see clearly now...In other words, for each $1 you do not
apply to your mortgage principal, you are effectively being charged
the mortgage rate on. Hold $3600 for a year and you'll effectively be
charged the mortgage rate on $3600. Not applying it towards the
mortgage principal makes sense only if you can get a greater return on
it or if there are other outstanding loans with higher rates where it
should be applied first.

On Apr 24, 12:10 pm, j...@kamens.brookline.ma.us (Jonathan Kamens)
wrote:

 om:


The other thing to consider is that even a single payment of extra principal
can make a big difference in the life of the loan.

Try making up a spreadsheet like this:
Take the annual interest rate of your mortgage and divide by twelve.

Here are your columns: Month   Outstanding Balance   Interest  Payment  
"Payment Applied to Principal"

For the first column just make it a running series from 1 to however many
months there are in your mortgage (10yr0months, etc)

Second column first row is the full balance of your mortgage.  For every row
after that it will be the result of previous row's outstanding balance minus
previous rows Payment applied to principal

Third column will be the monthly interest rate you calculated times this
row's outstanding balance

Fourth column can be done two ways.  First is to hardcode the mortgage
payment amount in each cell of the column.  This is the one I recommend for
right now.

Fifth column is this row's payment amount minus the interest from column
three this row.

Now populate the rest of the rows.  If you have done it right it should come
out very close to zero on the last month.

OK.  Now pick a month, any month, and add ten dollars to the payment value
for that month alone.  Now go down to the bottom of the sheet and see how
many months that has shaved off of the mortgage.  Play with that a while.

Now change the payment column so each row is equal to the one above it.  Seed
the first row with the payment as agreed to in the mortgage.  Again check the
last month to make sure it comes out right.

Now go to whichever month you are currently att in your mortgage and enter
something like your current payment plus $5.  This should duplicate on down
the column.  Now see what happens to the end point of your mortgage.  Play
with this a while too.

It is really amazing how either one small extra payment, or just a couple of
dollars each payment, can speed  up the payout.

If anyone has problem setting this up email me and I will make it up and send
you a copy.

** Posted from http://www.teranews.com  **

 
And that would include tax, and a higher set of interest payments.
Higher interest from not amortizing the loan over the year (*much* higher
interest), tax that is to be paid on the returns from the investment proposed as
an alternative, tax that it to be paid from not being able to deduct the
mortgage interest payments.

This would be nearly always a losing proposition.  

Banty