save or pay extra mortgage?

[sweeps]

Re: save or pay extra mortgage?

Individuals earning more than $110k and couples earning more than $160k are not eligible to contribute to a Roth.

[pinkeyy501]

Re: save or pay extra mortgage?

Individuals earning more than $110k and couples earning more than $160k are not eligible to contribute to a Roth.

I was not aware of that... I better call my CPA...

My husband has a regular job, but I work from home under LLC. My husband is also a member of LLC. My IRA account is under my individual name, though. Am I not elgible for IRA?

[pinkeyy501]

Re: save or pay extra mortgage? - Answer is in!

My uncle who has an accounting degree put together an amortization schedule in Excel sheet and it turns out that in the long run, I would be saving much more money to put $500 towards the big loan with lower interest rate.

The way he calculated is not the exact dollar amount as he used the current principal figure instead of the original loan amount which is close enough to see the difference.

If I put $500 extra towards principle to the big 30 yr loan, I would pay off 106 month early with approximately $196,000 interest savings.

If I put $250 extra towards principle to the big 30 yr loan, I would pay off 64 month early with approximately $120,000 interest savings.

If I put $250 extra towards principle to the small 15 yr loan (higher interest), I would pay off 61 month early with approximately $20,000 interest savings.

Combined Interest Savings for paying $250 extra towards principle on both loans = approximately $140,000 interest savings.

Therefore, Paying $500 extra on large loan is the greater savings by approximately $56,000.

Thanks to my uncle, I was able to see the clear difference by calculated number. Hope this post helps others here, too.

[sweeps]

Re: save or pay extra mortgage? - Answer is in!

My husband has a regular job, but I work from home under LLC. My husband is also a member of LLC. My IRA account is under my individual name, though. Am I not elgible for IRA?

If you're over the income limit, no, you're not eligible for a Roth IRA. However, since you own your own business, there are other retirement options such as a SEP IRA, SIMPLE IRA, Keogh, etc. Your CPA should be able to steer you in the right direction.

My uncle who has an accounting degree put together an amortization schedule in Excel sheet and it turns out that in the long run, I would be saving much more money to put $500 towards the big loan with lower interest rate.

This doesn't seem right to me. For option B, did you take into account that the $500 you were paying on the higher interest loan will be shifted to the lower interest loan after it's been paid off?

[pinkeyy501]

Re: save or pay extra mortgage? - Answer is in!

If you're over the income limit, no, you're not eligible for a Roth IRA. However, since you own your own business, there are other retirement options such as a SEP IRA, SIMPLE IRA, Keogh, etc. Your CPA should be able to steer you in the right direction.


This doesn't seem right to me. For option B, did you take into account that the $500 you were paying on the higher interest loan will be shifted to the lower interest loan after it's been paid off?

According to my calculation,

If I put $500 extra towards principle to the small 15 yr loan (higher interest), I would pay off 90 month early with approximately $32,000 interest savings.

If I put $500 extra towards principle to the big 30 yr loan after 90 month, I would pay off 66 month early with approximately $114,000 interest savings.

Combined Interest Savings for paying $500 extra towards principle on small loan the $500 extra on the big loan after 90 month = approximately $146,000 interest savings.

Therefore, Paying $500 extra on large loan is the greater savings by approximately $56,000.

The logic is that while you're working on the smaller loan, the interest on the big loan is racking up even more.

If I am wrong, I would love to see some numbers, even if it's hypothetical numbers.

Thank you!

[sweeps]

Re: save or pay extra mortgage?

I ran some quick calculations in Excel.

If you don't put extra money toward either loan, you'll end up paying $1,217,189 on both loans ($611,848 in interest).

If you put an extra $500 toward the larger, lower interest loan for the next 90 months, you'll end up paying $1,090,487 ($485,147 in interest).

If you put an extra $500 toward the smaller, higher interest loan for the next 90 months, you'll end up paying $1,082,274 ($476,934 in interest).

Notice you save more by putting extra money toward the higher interest loan. Here's the trick that your uncle might have missed: In the last scenario, you end up paying the smaller loan off faster, so you can't forget to put that $850 a month toward the larger loan. This of course helps pay off the larger loan faster. Hope this was helpful.

[pinkeyy501]

Re: save or pay extra mortgage?

I ran some quick calculations in Excel.

If you don't put extra money toward either loan, you'll end up paying $1,217,189 on both loans ($611,848 in interest).

If you put an extra $500 toward the larger, lower interest loan for the next 90 months, you'll end up paying $1,090,487 ($485,147 in interest).

If you put an extra $500 toward the smaller, higher interest loan for the next 90 months, you'll end up paying $1,082,274 ($476,934 in interest).

Notice you save more by putting extra money toward the higher interest loan. Here's the trick that your uncle might have missed: In the last scenario, you end up paying the smaller loan off faster, so you can't forget to put that $850 a month toward the larger loan. This of course helps pay off the larger loan faster. Hope this was helpful.

That is definitely something I didn't think about. Thank you for running the numbers. That really helps me to see the difference. I think I may go that route you suggested.

[debtfreeme]

Re: save or pay extra mortgage?

i agree with yor uncle:

Playing with some figures at the bank rate website: http://www.bankrate.com/brm/mortgage-calculator.asp

It shows with:

mortgage 1 you would have it paid off by 2027 instead of 2036 with 500 extra per month with the total you paid being: 383, 180.XX instead of someplace like 577,XXX in interest over the life of the loan.


Mortgage 2 total interest would have been 54,000 but if you add 500 per month there it becomes 25,000.

Seems like you would save more money in the end by placing it with mortgage 1.

Play with the figures, this is a great calculator to know about.

[debtfreeme]

Re: save or pay extra mortgage?

but i would talk to your CPA about the retirement issue. if you own your business you can put upto 40k away each year, provided you meet some small things.

check with him and start saving there asap.

[sweeps]

Re: save or pay extra mortgage?

mortgage 1 you would have it paid off by 2027 instead of 2036 with 500 extra per month with the total you paid being: 383, 180.XX instead of someplace like 577,XXX in interest over the life of the loan.

Mortgage 2 total interest would have been 54,000 but if you add 500 per month there it becomes 25,000.

The calculation is not that simple. Once one loan is paid off, that monthly payment is freed up and goes towards the remaining loan. Both loans get paid off faster as a result.

[debtfreeme]

Re: save or pay extra mortgage?

That is true but in the long run the grestest savings is to put it toward the larger of the two loans.

It is true that once the second is paid off then that payment would be applied to the first, but right now the savings more than equals that.

[sweeps]

Re: save or pay extra mortgage?

pinkeyy501, I stand by my calculations. You save more money by paying extra on the higher interest loan, and then putting that $850+$500 toward the lower interest loan.

[CJsoccerchic]

Re: save or pay extra mortgage?

I agree with sweeps, if I were in your situation, I would put the $ towards small loan first (because of high interest) pay that off, then onwards to the bigger loan. You pay less interest ultimately, and that is the desired goal.

[lucasrd]

Re: save or pay extra mortgage?

I have a theory on this for dedicated people...Make extra mortgage payments...yes that's good...but make them to a separate savings account that earns interest. Why pay $500 to the mortgage company when you can earn interest on that $500 while you are still paying on your mortgage...

Go to any mortgage calculator and compound interest calculator...punch in your numbers..you'll see by earning compound interest on your prepayments, you'll pay off your mortgage faster than if you make principal payments...

[sweeps]

Re: save or pay extra mortgage?

I have a theory on this for dedicated people...Make extra mortgage payments...yes that's good...but make them to a separate savings account that earns interest. Why pay $500 to the mortgage company when you can earn interest on that $500 while you are still paying on your mortgage...

I don't understand, can you explain?