Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.2 9/5/84; site othervax.UUCP Path: utzoo!watmath!clyde!burl!ulysses!allegra!mit-eddie!genrad!decvax!mcnc!philabs!micomvax!othervax!ray From: ray@othervax.UUCP (Raymond D. Dunn) Newsgroups: net.consumers Subject: Re: Prepayment of Mortgage Message-ID: <727@othervax.UUCP> Date: Tue, 26-Nov-85 17:17:07 EST Article-I.D.: othervax.727 Posted: Tue Nov 26 17:17:07 1985 Date-Received: Thu, 28-Nov-85 04:15:23 EST References: <693@drutx.UUCP> Reply-To: ray@othervax.UUCP (Raymond D. Dunn) Organization: Philips Information Systems - St. Laurent P.Q., Canada Lines: 73 Summary: In article <693@drutx.UUCP> slb@drutx.UUCP (Sue Brezden) writes: > >We prepay on our mortgage regularly..... > >The way we do it is to pay the principle on several payments ahead of >the payment we are making. As an example of how it works, take the >following figures for a loan (highly imaginary--but the idea is there.) > > payment number payment interest principle > 1 975.00 954.95 20.05 > 2 975.00 954.25 20.75 > 3 975.00 953.35 21.65 > 4 975.00 952.85 22.15 > 5 975.00 952.05 22.95 > 6 975.00 951.15 23.85 > 7 975.00 950.55 24.45 > 8 975.00 950.00 25.00 > >The interest amount with each payment decreases, while the principle >increases. By the end of the loan, each payment is mostly principle, >but at the start it is mostly interest. > >So, you pay payment #1, $975.00 plus the principle on payments 2-6, >which adds up to $111.35, if I've done my addition right. You have >now avoided the interest on those payments, which is $4763.65. The >next time, you pay payment #7, plus 8-12, or whatever. > I think there is a major flaw in this argument. Are you sure that what you think you are doing to your loan is what you are actually doing? Seems to me that by paying the extra ($111.35) all you are doing is reducing the amount of the PRINCIPAL (note spelling), not the TERM of the loan by the months worth of the principal payment. What does it say in your loan agreement? Let me first digress for those of you (most people I talk to) who do not understand why the early payments pay off so little principal, and the late payments a lot of principal: Loan repayments are computed so that every payment throughout the loan is the SAME AMOUNT (key point). However in the first month of the loan, you owe, and thus pay interest on, the full initial amount. In the month before the last payment, the amount you owe is just slightly less than the payment amount, and thus the interest for that month is very small. All months in between are in proportion. Thus (I hope it is obvious) most of the first payment is interest, most of the last principal, and the rest in between in proportion. Now lets get back to Sue's example. She pays her normal payment ($975) of which $20.05 is principal. Assuming the loan is for $100,000 over 360 months, she now owes $99979.95 and is effectively borrowing $99979.95 for 359 months. If she pays a further $111.35, this does NOT reduce the term of the loan by another 5 months, it only reduces the principal to $99868.60 which the lender will normally assume is still for a period of 359 months. Now the difference in payments between $99979.95 for 359 months ($975) and $99868.60 for the same term, will be extremely small (I do not have either my mortgage tables nor my TI business calculator with me, but less than $1). If she continues to pay the $975 (as if she still owed the larger amount), she is only paying <$1 more than she should. The loan may be payed off one month early if she is lucky, but certainly not 5 months early. This works similarly every month she makes an extra payment. If I am wrong, be my guest, flame away. (By the way, why on earth would you want to repay your mortgage early down there in the good old U.S. of A., when you get tax relief on the interest? I'm sure your $111.35 could much more profitably be invested elsewhere!) Ray Dunn. ..philabs!micomvax!othervax!ray