Accelerated Amortization (and 15 vs. 30 year term)

David · Joined: 19 May 2004 Posts: 754 Location: Atlanta, GA

Ok, I used big words to say, "paying off a loan faster". I've always heard that it is good to make payments toward pricipal early in the loan, and it helps to pay off the loan faster.

Let's say I get a 30 year loan, but make payments like it is a 15 year loan, would there be much difference in the total amount paid, compared to if I just got a 15 year loan in the first place?

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

Using the following figures:

100,000 @ 6% for 30 years Pmt = Approx $600
100,000 @ 5.25% for 15 years Pmt = Approx $800

If you add the $200 as a principle only payment each month, your loan would be paid off in 197 months. You'd have 17 months more worth of payments, with more interest.

That is a rough figure, but it's pretty close. I'm not even saying those are current rates I just used easy to figure out numbers.

But on this plan you'd have more flexibility to be able to make your monthly payments in whatever manner you choose.

Just for kicks I put it in as saving that $200 and paying it 1x a year ($2400) and the difference bumps it up to 201 months (additional 21 months.)

Hope that helps.

Nikko · Joined: 20 Jan 2005 Posts: 536 Location: Northern CA

Why ever pay the house off? Consider this...

It is the biggest tax break you've got.
It is the cheapest money you will ever borrow.
You can't access all of that equity if you lose your employment.

I say this, although you may find it a bit radical:

Take out as much of an equity loan on the house as you can, and put that cash-out into an investment. Let the money work for you, rather than just sit there. Even if you put it in a simple savings account at very little interest, you have immediate access to your equity, even when you cannot obtain a bank loan because of some emergency, like loss of employment.

85% of this country's self-made millionaires retain a large mortgage on their homes, even though they could easily pay them off at any time.

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

Because most people aren't financially intelligent enough to utilize this effectively, and those that know how to leveredge their cash like this already are doing this.

Nikko · Joined: 20 Jan 2005 Posts: 536 Location: Northern CA

It is very difficult to explain this to older folks, who went through the depression era, when banks were calling back notes and taking homes left and right. In today's economic structure, this really is not possible.

It is much easier to talk to the younger audience about this. Unfortunately, so many of today's homeowners are old LOL!

capnmorgan5555 · Joined: 29 Jan 2005 Posts: 29

So are you saying since most people aren't financially intelligent enough to understand this concept you shouldn't try to educate them?

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

If you are not qualified to offer financial advising I would say that is correct. Great reason to have someone talk to that financial planner buddy of yours, but who is it that's going to get slammed when their loan goes into default because they lost it all in the market based on your recommendation?

Jenie0109 · Joined: 27 Jan 2009 Posts: 307 Location: chicago IL

nice post. thanks a lot for your ideas.