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Re: save or pay extra mortgage?
Basically I'm being an advocate for compound interest. I believe it is better to save money that compounds rather than paying off a simple-interest loan.
Let's say you have a 94,000 loan fixed at 6.75% and make $500 principal payments monthly. You'll pay off the loan in 7.5 years and have saved $30,000 in interest.
Now Let's say instead of paying $500 toward your mortgage, you invested it in a safe index fund that earns a modest 9.5% return annually. If you made the $500 deposits every month for 7.5 years, you would have $65,782 in that mutual fund where as the loan balance after 7.5 years with no prepayments would be about $58,000. So you could pay off that loan and still have $7,000 in cash...
OR
You could continue to pay on the loan for the 15 year term and keep putting away that extra $500/mo into the mutual fund. After 15 years you would have paid about 55,000 in interest. However, your mutual fund would now be worth $199,541.61. Subtract the $30,000 of interest you could have saved by making prepayments, and you're coming out about $170,000 ahead.
Now, 15 years later, loan #2 is gone and you have $199,541 in your mutual fund. Let's say you just let that simmer for a while and keep making the $500/mo investment into it (now you have that $850 extra for spending because loan #2 is paid off) Let's let it sit for 15 more years until Loan #1 is paid off. After 15 more years, your mutual fund will be worth $1,024,565.02.
What you're basically doing is sacrificing interest early to take advantage of the "time" element of compounding interest...
Hope that makes sense...
Basically I'm being an advocate for compound interest. I believe it is better to save money that compounds rather than paying off a simple-interest loan.
Let's say you have a 94,000 loan fixed at 6.75% and make $500 principal payments monthly. You'll pay off the loan in 7.5 years and have saved $30,000 in interest.
Now Let's say instead of paying $500 toward your mortgage, you invested it in a safe index fund that earns a modest 9.5% return annually. If you made the $500 deposits every month for 7.5 years, you would have $65,782 in that mutual fund where as the loan balance after 7.5 years with no prepayments would be about $58,000. So you could pay off that loan and still have $7,000 in cash...
OR
You could continue to pay on the loan for the 15 year term and keep putting away that extra $500/mo into the mutual fund. After 15 years you would have paid about 55,000 in interest. However, your mutual fund would now be worth $199,541.61. Subtract the $30,000 of interest you could have saved by making prepayments, and you're coming out about $170,000 ahead.
Now, 15 years later, loan #2 is gone and you have $199,541 in your mutual fund. Let's say you just let that simmer for a while and keep making the $500/mo investment into it (now you have that $850 extra for spending because loan #2 is paid off) Let's let it sit for 15 more years until Loan #1 is paid off. After 15 more years, your mutual fund will be worth $1,024,565.02.
What you're basically doing is sacrificing interest early to take advantage of the "time" element of compounding interest...
Hope that makes sense...
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