Help me settle this 20 yr fixed vs 30 yr fixed mortgage debate

[scotchnrocks]

It doesn't work like that. If I paid the difference ($170) into principal on the 30 year fixed every month, at the end of year 20 I would still owe ~$40k on the loan, where as the balance is paid in full on the 20 year mortgage option. Yet in both cases I paid the same amount.

You have to look past the interest rate to the amortization table. If you finance a car at 5% for 5 years you will always pay more than if you financed it for 5% for 1 year.

[Thremp]

Umm... I thought when you made a payment toward principle... It went toward principle...

Can you explain?

[scotchnrocks]

30 year fixed @ 6.125% = $911/month payment

20 year fixed @ 6.125% = $1085/month payment

difference = $174/month

At the end of year 20, the 20 year fixed is paid for free and clear, but the principle balance on the 30 year fixed is
$81,630 (not even half the loan has been paid back). Take $174*240months=$41,760.

So even contributing the difference to principle you've paid the same thing but still owe ~$40k because of the way the loan amoritizes.

[Thremp]

http://www.bankrate.com/brm/mortgage-cal...rtization+Table


Try using that. I probably should just googled for it initially. I can't think of a circumstance where getting a longer loan and applying extra payments to princeple results in a longer loan. In fact in the example I did. You end paying it off the exact same month while giving youself greater financial flexibility.


Prepayment penalties are a concern and something that must be looked into.

[scotchnrocks]

There's something I don't understand here. So the additional payments are affecting the amortization I guess? Maybe I am wrong, I don't think I can change it though since my closing is Tuesday. Oh well.

[Thremp]

[ QUOTE ]
There's something I don't understand here. So the additional payments are affecting the amortization I guess? Maybe I am wrong, I don't think I can change it though since my closing is Tuesday. Oh well.

[/ QUOTE ]

Yeah you pay down the amount you are borrowing. They don't charge you full interest for the initial amount if you apply payments to principle. This is something I'm gonna look to in the future as I'd like to pay off my first place to then use as rental property. Ideally I want a very long mortgage with no prepayment penalty and a very low rate (sweet pipe dream). Since my income isn't very stable I can tack a few thou on when I need to and can leave it off when I don't.

[ShineOn]

You are not figuring in the 6.125% per year interest that you are saving by paying down the principle each month. The way you figured it, you would just be applying the $41,760 extra payment at the end of year 20, not throughout the life of the loan.

IF you were to put the $174 every month into some sort of investment vehicle that was paying 6.125% return, and apply that at the end of year 20, you would surely have more than $41K. Paying the interst early will have the same net effect. This is why you should invest the money into something besides paying down your mortgage if you can beat the rate of the mortage as an average rate of return.

[scotchnrocks]

I know there is no prepayment penalty on my 20 year fixed, so I'd imagine the 30 year is the same. Thanks for the link Thremp.

[scotchnrocks]

But therein lies the trick right? You must be paying down the principal the entire time anyway to see the advantage. If the money is spent investing, then the loan continues to amoritize at the 30 year rate and you will still owe the $81k principle at the end of year 20. Your investment will have to do about 9% ROI each year to beat the 20 year after you figure in the capital gains tax.

[Thremp]

[ QUOTE ]
But therein lies the trick right? You must be paying down the principal the entire time anyway to see the advantage. If the money is spent investing, then the loan continues to amoritize at the 30 year rate and you will still owe the $81k principle at the end of year 20. Your investment will have to do about 9% ROI each year to beat the 20 year after you figure in the capital gains tax.

[/ QUOTE ]

Yeah, most people do it for the versatility IIRC. Though I don't talk to a ton of people about their mortgage plans.

I wanna say that off the cuff you should do things in vaguely this order

Tax defer or exempt > Retirement > Prepay Mortgage