"oparr@[EMAIL PROTECTED]
" <oparr@[EMAIL PROTECTED]
> writes:
> 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?
If you take that $300/mo and invest it - you come out ahead
if and only if that investment itself gains more than the
interest you'd have had to pay on the mortgage. Ignoring
liquidity benefits. So, lets's say you had a mortgage
at 6%, then those 12 payments of $300/ea need to have
grown to something over $3700, actually, by the end of
that year. That first payment has a year to accumulate
interest. That second payment has 11 months to accumulate
interest. etc. etc. If you kept that money in your
checking account earning nothing, then dump it all into
that mortgage at the end of the year, you would definitely
have done better to have prepaid that mortgage monthly -
by exactly that $120 or so that those principal payments
would have saved you in interest.
Every single early principal payment *does* have the
economic benefit of saving you interest that you'd
have otherwise paid. (You're exactly right - monthly
payments don't change - but what those monthly payments
are composed of does - if you prepay your mortgage, then
your payments quickly become more principal and less
interest than they'd been.) But they also have a similar
economic op****tunity cost - that money could have been
used for something else. In simple financial terms,
you come out ahead if you use that extra money for the
most productive thing you can. But it's never quite
as simple as all that, since (a) it's generally pretty
hard to get a return on that cash invested otherwise
which is going to beat your mortgage *risklessly*; and
(b) liquidity is a bit harder to put a value on - if
you've used the cash to pay down your mortgage, you no
longer have easy access to it - if you accumulate that
cash elsewhere and then, say, lose your job, you can
use that accumulated cash to keep paying your mortgage
for a while. You absolutely pay a price for that
liquidity - but that price may be cheap next to the
value of that liquidity.
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