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Path: utzoo!watmath!clyde!burl!ulysses!mhuxr!mhuxn!ihnp4!qantel!dual!lll-crg!ucdavis!ucbvax!decvax!decwrl!Glacier!kestrel!king
From: king@kestrel.ARPA
Newsgroups: net.invest
Subject: Re: A penny saved...
Message-ID: <1555@kestrel.ARPA>
Date: Thu, 3-Oct-85 23:37:48 EDT
Article-I.D.: kestrel.1555
Posted: Thu Oct  3 23:37:48 1985
Date-Received: Sun, 6-Oct-85 06:16:53 EDT
References: <161@aplvax.UUCP>
Distribution: net
Organization: Kestrel Institute, Palo Alto, CA
Lines: 44
Summary: hear, hear

In article <161@aplvax.UUCP>, ded@aplvax.UUCP (Don E. Davis) writes:
> I've been adding an extra $100 to my mortgage payment every month.  Ignoring
> taxes, this is the same as investing this money at 12.5% (my mortgage rate).
> A pretty fair return (and the money in effect is insured!), but of course 
> it gets locked up in equity, so if interest rates suddenly jump to 20% 
> I'll miss the boat.
> 
> Here is an alternative I've been considering.  What if instead I add
> the $100 to my car payment (also a 12.5% loan).   After the loan is paid
> off I will continue to make the payment (plus the extra $100) to a savings 
> account so I can buy my next car with cash, thereby saving on the interest.
> Is this second scenario preferable to the first?
> 
> -- 
> 
> 					Don Davis
> 					JHU/APL
> 				...decvax!harpo!seismo!umcp-cs!aplvax!ded
> 				...rlgvax!cvl!umcp-cs!aplvax!ded

It is probably better to knock down the carloan, unless you have the
type of mortgage in which the minimum payment is recalculated if you
overpay early in the loan.  (I am assuming that the car loan has less
time left than the home loan.)

The key observation is that, since you obviously have the maturity to
keep to a schedule you adopt, you want maximum flexibility which, in
turn, means always have the lowest total payment possible.  That is
consistent with paying off the carloan, unless your minimum mortgage
payment is refigured downward after you make a few overpayments.

I further claim that when the carloan expires you should dump the
former carloan payments into the home loan if you think that interest
rates will continue to be below 12.5% on illiquid investments.  This
can be tempered by your estimate of what rate you will have to pay on
the next carloan if you take one out.


It pains my typing fingers terribly to type things that might increase
the number of car loans in the future, but the joy of turning a 30
year mortgage into a fifteen year mortgage is probably worth taking
out a car loan in (say) 1990 that might otherwise be unnecessary.


-dick


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