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Payoff home loan - one lump payment or spread out

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qingcong
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Payoff home loan - one lump payment or spread out  Reply with quote  

Hi all, first post here. I wanted to get some feedback on the difference between options for paying off my home loan early. Assuming I have the means to do either, option 1 is to make one giant lump extra principal payment and option 2 is to spread out this same amount over many years. I made a worksheet that suggests the giant lump payment works out better, but of course there are many factors and uncertainties to consider. Wanted to get some opinions on what you guys thought.
Post Sun Sep 06, 2015 7:04 pm
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oldguy
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Depends on your interest rate - but with my houses (home & rentals) I do the opposite when I can get a good rate.

Eg, say that one of the houses appreciates until it has an extra $50k of equity. I refi it, get a 30 yr fixed rate loan that is $50k bigger. That adds about $270/m to the payment (ie, $97,000). So I pay an extra $47k of interest for the use of that $50k for 30 yrs.
I place the $50k lump sum in the SP500 Index Fund (mine is at Vanguard) at a 11%/yr average annual return, the $50k grows to $1,100,000.

Here is a site for the history of SP500 -
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.VeyhJpe8k3h
If you check a few 30yr-time-blocks you'll see that they average around 11%./yr. But it is truly a longterm return, the SP500, taken just a few yrs at a time, could be anything, you need the patience/discipline to leave it alone and let the power of compounding work for you. It takes time for the returns to statistically average and converge on 11%.

You're an engineer - you probably know that F=1.11^30 = 22. Or e^(RY) = about 27 (R=.11, Y=30).

BTW, I always use 30 yr fixed rate loans - no 15 yr loans, no balloon loans, no VARs, no designer loans - I want to be certain of my money source, don't want a balloon to come due in the middle of a housing recession, don't want to be stuck with a VAR that might jump from 5% to 14%. (1983?), etc. By locking the parameters of my money source, my risks are confined to my investing side of the equation.

To answer your question - ie, a lump payoff or an incremental payoff - it makes almost no difference. It depends on where that money is parked - if you use <1% savings accounts, it is better to quickly put the money to work retiring a 4% or 5% loan. If the money is parked in an 11%/yr fund, plus you would need to pay a bunch of capital gains tax if you sell, a better plan would be to drag it out incrementally.
Post Sun Sep 06, 2015 8:43 pm
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pdgoldinc
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Pay your mortgage off or refinance?  Reply with quote  

I agree with oldguy, I would take money out and invest it somewhere else, make it work for you. Usually the interest rates are low enough to keep the mortgage.
To build wealth is explainable in two short phrases:
Earn as much as you can
Spend as little as you can and invest the difference wisely!
Post Sat Oct 31, 2015 9:11 am
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Al_is_Well
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Re: Pay your mortgage off or refinance?  Reply with quote  

quote:
Originally posted by pdgoldinc

To build wealth is explainable in two short phrases:
Earn as much as you can
Spend as little as you can and invest the difference wisely!


Well said!
Post Mon Dec 28, 2015 9:04 pm
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