This has probably been discussed to death so pardon me for reviving
this dead horse one more time. Back in 2004 the following post was
made in this forum;
http://groups.google.com/group/misc.invest.financial-plan/browse_frm/thread/7399c334f7a88c69/2e6829f5513bf411?lnk=st&q=mortgage+principal#2e6829f5513bf411
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I learned the hard way that extra mortgage payments are the dumbest
thing you can do. While they reduce your principal, they do not
change the amount of interest you owe on each payment because that
amortization schedule is created at the beginning of the loan. Thus,
my extra payments just went into the bank's coffers. I received no
economic benefit from that money. Now I set aside the extra mortgage
principal payment in a savings account where it earns 2% interest and
is always available to me. In six years, I will have enough aside to
pay off the balance of my mortgage. I can then decide whether I want
to pay off the mortgage or not. In the meantime, I have full access
to this money and it is earning me interest income. I could kick
myself for not realizing the stupidity of paying extra mortgage
payments to the bank sooner.
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All who replied to this post seemed to miss the point the fellow was
trying to make. Agreed, he was technically incorrect here;
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While they reduce your principal, they do not
change the amount of interest you owe on each payment because that
amortization schedule is created at the beginning of the loan.
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I think what he meant, as opposed to what he said, was that paying
down the mortage principal doesn't reduce the minimum required monthly
mortgage which is determined at the beginning of the loan. However,
paying down the mortgage principal shortens the life of the loan which
I think the fellow also realized.
Here is the point I think the fellow was trying to make that I tend to
agree with....Up to a point (and no doubt this point in time can be
calculated), it is better to invest monthly mortgage pay down amounts
and pay down the principal as a large lumpsum later. Ideally, one
should also refinance at that time if prevailing interest rates favor
it.
If for example you are making extra payments of $300 a month to pay
down the principal, wouldn't you be better off investing that $300
each month and paying down the principal with $3600 at the end of the
year instead? Or, does doing it on a monthly basis shorten the loan
more than doing it on a yearly basis?
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