I see and hear it all the time that someone's mortgage rate is X (let's say the reference to pre-pandemic rates, so maybe sub 3%), so there's no reason to pay it off early when compared to returns in the market and the market being a better option.

But in reality, that's not necessarily the case with amortization schedules the way they are. The actual percentage of the loan you end up paying will be much much higher than the interest rate. Is there something I'm missing or are people generally glossing over this?

But in reality, a 3% interest rate on a 30-year mortgage isn't costing just 3% of the house purchase price.

As in everything, it's always "compared to what?"

Your currency is devaluing at a rate as low as 9% annually and many think inflation is 15%+

Many folks instinctively prefer to pay that low interest rate with future dollars that are worth less rather than a pile of current dollars

tlh3842 said:

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I see and hear it all the time that someone's mortgage rate is X (let's say the reference to pre-pandemic rates, so maybe sub 3%), so there's no reason to pay it off early when compared to returns in the market and the market being a better option.

But in reality, that's not necessarily the case with amortization schedules the way they are. The actual percentage of the loan you end up paying will be much much higher than the interest rate. Is there something I'm missing or are people generally glossing over this?

But in reality, a 3% interest rate on a 30-year mortgage isn't costing just 3% of the house purchase price.

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And investing that money isn't a one time return either.

It seems you are wanting to treat your mortgage savings a compound interest (correct), but want to treat investment returns as a one time, one year return.

Maybe I am misunderstanding the argument.

I think the confusion is an argument I used to hear about how much of your payment goes to interest vs principal in the first several years.

However, if you run a mortgage calc, you will see that you truly do pay 3% interest on the principal. It may be that the interest is 70% of the total payment, but it is still 3% of the principal.

edit to say that I oversimplified it - you are likely paying more like 3.12% vs 3%. This is negligible, but some would still argue that they are right because you are paying more than the 3%.

I think the argument really comes down to what you do with the money instead of throwing it at your mortgage. I.e. if your rate is under 4% and you have an extra $500 a month you could be throwing at, historically speaking you would be better off throwing that $500 into the market. It's much more likely for the balance on that stock portfolio to get larger than the payoff amount sooner than had you simply applied the extra $500 at the mortgage.

In that scenario you could at that point sell the stocks and write a check to pay off your mortgage. I am at this step now (even after the recent pullback, I could sell some of my after tax stocks and write a check to pay off my mortgage this afternoon). However the way I look at it is that no one will lend me money today at the rate my mortgage is locked to, so why should I be in a hurry to pay that loan down. If instead I had thrown that money at the mortgage, I would still be a few years away from paying the loan off and would have to go through a HELOC or cash out refinance to get into any of the equity.

But I agree that if you were to simply spend the extra $500 and not actually invest it, you are better off throwing it at the mortgage than doing that.

10 year t-bills are ~3%. A mortgage is 2.5%. Rather than paying off the mortgage, someone would be better off investing in t-bills than paying off a mortgage assuming no taxes impact (which is not true, though would be offset by mortgage interest deduction). Riskier assets are yielding more.

Having low, fixed rate debt during a highly inflationary time is great for most consumers.

Assumptions: $300,000 loan, 30 year at 3%
Assume 5% annualized return investing instead of paying loan.

Payment on loan = ~$1,265
To pay it in 15 years, payment would be ~$2,072
(Difference of ~$807)

Make required payment for 15 years, and invest difference (807/mo) for 15 years:

Remaining loan balance after 15 years = ~$183,152, investment balance = ~$215,686

Bonus, liquidity is really valuable. Investment return isn't guaranteed by any stretch, so that would be the debateable point. Also, hate seeing people hurry to pay off the house, so they can borrow to buy something else.

Mortgage is still a tax deduction.

Permits you to highly leverage your house while the value inflates.

Interest compounds on both investments and debts.

Thank you for attending my Ted talk

jagvocate said:

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As in everything, it's always "compared to what?"

Your currency is devaluing at a rate as low as 9% annually and many think inflation is 15%+

Many folks instinctively prefer to pay that low interest rate with future dollars that are worth less rather than a pile of current dollars

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That's always been my philosophy but the way things are going, who tf knows what's gonna happen.

We in uncharted waters now.

These are just risk aversion and cash flow decisions IMO

tlh3842 said:

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I see and hear it all the time that someone's mortgage rate is X (let's say the reference to pre-pandemic rates, so maybe sub 3%), so there's no reason to pay it off early when compared to returns in the market and the market being a better option.

But in reality, that's not necessarily the case with amortization schedules the way they are. The actual percentage of the loan you end up paying will be much much higher than the interest rate. Is there something I'm missing or are people generally glossing over this?

But in reality, a 3% interest rate on a 30-year mortgage isn't costing just 3% of the house purchase price.

---

You aren't understanding how interest on mortgages works. It's calculated on the remaining balance which decreases with each required minimum principal and interest payment. If you make the required payment for 30 years you pay $155,332 in interest. The interest on the first payment is $750. The interest on the final payment is $3.15. The required P&I payment is $1,264.81/month. If you paid $1,500 each month you would reduce the term to 278 months because you are decreasing the interest due at an accelerating rate.

What debt has compound interest?

jja79 said:

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tlh3842 said:

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I see and hear it all the time that someone's mortgage rate is X (let's say the reference to pre-pandemic rates, so maybe sub 3%), so there's no reason to pay it off early when compared to returns in the market and the market being a better option.

But in reality, that's not necessarily the case with amortization schedules the way they are. The actual percentage of the loan you end up paying will be much much higher than the interest rate. Is there something I'm missing or are people generally glossing over this?

But in reality, a 3% interest rate on a 30-year mortgage isn't costing just 3% of the house purchase price.

---

You aren't understanding how interest on mortgages works. It's calculated on the remaining balance which decreases with each required minimum principal and interest payment. If you make the required payment for 30 years you pay $155,332 in interest. The interest on the first payment is $750. The interest on the final payment is $3.15. The required P&I payment is $1,264.81/month. If you paid $1,500 each month you would reduce the term to 278 months because you are decreasing the interest due at an accelerating rate.

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That makes sense but there's the problem. People casually say I'm not paying it off early, which to me implies not making any extra principal payments at all. What you describes makes sense to not throw all your money at your mortgage while still decreasing the number of payments significantly.

So using online mortgage calculators for a $400k loan at 3% interest for 30 years. Monthly P&I comes to $1,686.42, which making that payment 360 times comes to $607,111.20. To me, a truly 3% loan would mean at the end of a 30 year loan on $400k, I'd have only spent $12k on interest. When in reality it cost over $200k to get that loan.

I understand the risk aversion and flexibility of funds, but on the surface it seems like a disservice to say my 3% is cheaper than ~8% return in the market (just using an example). When if you aren't paying any extra principal it's not 3% vs 8%, it's really ~30% vs 8%. When you consider most aren't staying in their house for 30 years, that muddys the water even more.

I'm open to learning and hearing perspectives, but from what I generally read I think it can lead folks less educated on mortgages astray (or it's at least not giving them the full picture with which to base their decision on).

jja79 said:

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What debt has compound interest?

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I was trying to simplify this question from the op as much as possible (read lazily).

Quote:

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But in reality, that's not necessarily the case with amortization schedules the way they are. The actual percentage of the loan you end up paying will be much much higher than the interest rate. Is there something I'm missing or are people generally glossing over this?

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I read his comment/question as meaning the total interest paid on a loan is more than the APR.

For example for $100,00 @5%
Total interest paid would be $93,255 vs $5,000

Yes.. op... You are missing something... It's an annual interest rate, to borrow $400,000. No, that isn't a 1 time 3% fee, it's a borrowing cost for the life and amount of the loan..

"So using online mortgage calculators for a $400k loan at 3% interest for 30 years. Monthly P&I comes to $1,686.42, which making that payment 360 times comes to $607,111.20. To me, a truly 3% loan would mean at the end of a 30 year loan on $400k, I'd have only spent $12k on interest. When in reality it cost over $200k to get that loan."

Couple thoughts:

1) $400,000 mortgage at 3% interest for 30 years = $607,109 total paid.

2) $400,000 home at 3.8% appreciation for 30 years = $1,224,561 home value.

3) $400,000 invested at 8% return for 30 years = $4,025,062 value.

4) Make sure your monthly figure doesn't include taxes, insurance, and PMI when comparing.

tlh3842 said:

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So using online mortgage calculators for a $400k loan at 3% interest for 30 years. Monthly P&I comes to $1,686.42, which making that payment 360 times comes to $607,111.20. To me, a truly 3% loan would mean at the end of a 30 year loan on $400k, I'd have only spent $12k on interest. When in reality it cost over $200k to get that loan.

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lol.

It's 3% a year, not 3% total.

If you got a $400k mortgage at 3%, but your loan length was 1 year, then yes, you'd pay $12k worth of interest. So paying it off at payment 1 would save you ~$12k, but if you invested that $400k in market at 8%, you'd have $32k at the end of the year.


Now spread that out over 30 years. Say you have $400k cash. You can buy a house or invest in market. Lump investing it at 7% annual growth over 30 years is ~7X growth so $3.2m on your initial $400k. But if you pay off 30 year mortgage in year 1, you save, in your example, $200k on interest. Now you also have $1686 in freed up revenue if you pay off in year 1, so invest that monthly, at 7% annual growth for 30 years, and you have ~$2m.

Summary;
Pay your monthly mortgage, but put $400k in market on day 1, you end up with $3.2m and no mortgage at the end
Compared to, let's pay off house day 1, I save $200k in mortgage interest and earn another $2m by investing my freed up monthly mortgage I no longer have to pay, so $2.2m and no mortgage at the end.

Which seems better to you?

Would you make a $300K investment that yielded $12K over 30 years? Of course not. Not being that guy but you don't understand how interest work.

Who told you this? That's not correct.

I stand corrected.

Well then why do I need a several day payoff quote if I want to pay off my loan/refinance/sell/etc.? I guess I always assumed there was an average daily balance component factor in.

They'll always quote a payoff several days after the anticipated payoff and then refund you the difference based on the date it's received.

tlh3842 said:

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jja79 said:

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tlh3842 said:

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I see and hear it all the time that someone's mortgage rate is X (let's say the reference to pre-pandemic rates, so maybe sub 3%), so there's no reason to pay it off early when compared to returns in the market and the market being a better option.

But in reality, that's not necessarily the case with amortization schedules the way they are. The actual percentage of the loan you end up paying will be much much higher than the interest rate. Is there something I'm missing or are people generally glossing over this?

But in reality, a 3% interest rate on a 30-year mortgage isn't costing just 3% of the house purchase price.

---

You aren't understanding how interest on mortgages works. It's calculated on the remaining balance which decreases with each required minimum principal and interest payment. If you make the required payment for 30 years you pay $155,332 in interest. The interest on the first payment is $750. The interest on the final payment is $3.15. The required P&I payment is $1,264.81/month. If you paid $1,500 each month you would reduce the term to 278 months because you are decreasing the interest due at an accelerating rate.

---

That makes sense but there's the problem. People casually say I'm not paying it off early, which to me implies not making any extra principal payments at all. What you describes makes sense to not throw all your money at your mortgage while still decreasing the number of payments significantly.

So using online mortgage calculators for a $400k loan at 3% interest for 30 years. Monthly P&I comes to $1,686.42, which making that payment 360 times comes to $607,111.20. To me, a truly 3% loan would mean at the end of a 30 year loan on $400k, I'd have only spent $12k on interest. When in reality it cost over $200k to get that loan.

I understand the risk aversion and flexibility of funds, but on the surface it seems like a disservice to say my 3% is cheaper than ~8% return in the market (just using an example). When if you aren't paying any extra principal it's not 3% vs 8%, it's really ~30% vs 8%. When you consider most aren't staying in their house for 30 years, that muddys the water even more.

I'm open to learning and hearing perspectives, but from what I generally read I think it can lead folks less educated on mortgages astray (or it's at least not giving them the full picture with which to base their decision on).

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Annually it is 3% vs 8%.

As I mentioned before, you seem to be treating it like that 8% doesn't compound each year. Just like you are paying 3% on your outstanding principal every year, you are earning 8% on your accumulated (including prior interest) investment every year.

That's why they are required to disclose the full amount of the loan up front - because it is far more than that.

But again, you are not saving more than an 8% investment would make you over the same time period, because it TOO is annual. It TOO accumulates.

Paying off 3% will always be worse on paper than a higher % investment. The only things that come into play are emotional things and the fact that you generally cannot guarantee the investment return, while the mortgage is typically fixed.

Also, just to drive it home (as somebody else posted) -

When you say it isn't 3% vs 8%, it's 30% vs 8% - no, it's not.

400k invested at 8% for 30 years is $4.025 million.

(somebody can correct my math if that is off - quite possible )
So it's 30% vs 900%

Another simple check would be to take your above scenario and run the numbers.....

Your $400k mortgage calculator is $1,686.42 / month which totals $607,111.20 over 30 years.

Say you have $2,000 / month to spend. If you pay $2,000 / month towards your mortgage what does that drop the total paid to? If you just put that extra $313.58 in the market what are those estimated returns?

That cuts the mortgage down by 78 payments.

Here are the excel (or google sheets if you don't have excel) to play with your examples

You said $400k at 3%, the formula for monthly payment is:

=PMT(3%/12,30*12,-400000,0)

$1686.42

If you want to see how many years it would take to pay off the loan adding $500 a month to the payment the formula is:

=NPER(3%/12,1686.42+500,-400000,0)/12

20.4 years (so 9.6 years sooner)

If instead you invested the $500/mo at 5% the amount you would have after 20.4 years is this formula

=FV(5%/12,20.4*12,-500,0)

$212,078.91

The amount you would owe at the end of 20.4 years if you only made the minimum payment on your loan is this formula:

=FV(3%/12,20.4*12,1686.42,-400000)

$168,619.33

So at that point in time if you decide you really want to be debt free you could simply sell 169k of your stocks, pay off the rest of your mortgage, and still be up 43k. This all using very conservative 5% rate of return... using something more like 7-9% and the math gets even more against paying down the house early, not to mention the liquidity you will have the entire time you are making payments (its much easier/cheaper to sell stocks than do a refinance).

JohnLA762 said:

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Couple thoughts:

1) $400,000 mortgage at 3% interest for 30 years = $607,109 total paid.

2) $400,000 home at 3.8% appreciation for 30 years = $1,224,561 home value.

3) $400,000 invested at 8% return for 30 years = $4,025,062 value.

4) Make sure your monthly figure doesn't include taxes, insurance, and PMI when comparing.

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The majority of people don't have 400,000 to put in the market all at once so #3 would need to be done in payments and thus lowering that number substantially. Secondly I think a lot of people make a mistake of thinking of your house as an investment. It is more of a bank account. I say pay the 3% for 30 years and invest the extra. That's cheap money from someone else

jja79 said:

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What debt has compound interest?

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All of them.

I was responding to the original topic which was mortgage. They don't have compound interest.

The math is the math. All else equal with lower interest rates you should be taking excess cash to invest in the stock market which will on average yield you a higher rate of return. I'm also a risk adverse individual I know that one day I might go to the doctor and get some bad news where my stock gains will never be realized and monthly cash flow might add more stress to my family life (yes I have savings and insurance, but point remains).

I see value in having a personal balance sheet with no liabilities to mitigate risks and to leave open the opportunity to quit the rat race to do some thing else with my time that pays far less but who cares, I can afford the things I care about.

Malibu2 said:

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The math is the math. All else equal with lower interest rates you should be taking excess cash to invest in the stock market which will on average yield you a higher rate of return. I'm also a risk adverse individual I know that one day I might go to the doctor and get some bad news where my stock gains will never be realized and monthly cash flow might add more stress to my family life (yes I have savings and insurance, but point remains).

I see value in having a personal balance sheet with no liabilities to mitigate risks and to leave open the opportunity to quit the rat race to do some thing else with my time that pays far less but who cares, I can afford the things I care about.

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In that situation, I'd much rather have a balance sheet with significant liquid assets and higher net worth... having a mortgage payment is only an issue if you lack liquid assets.

Now, if you fail to properly accumulate liquid assets and positive net worth, and find yourself restricted to limited fixed income living, you would benefit from not having any debt.

jja79 said:

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I was responding to the original topic which was mortgage. They don't have compound interest.

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My mortgage has compound interest.

I tend to take the middle of the road approach knowing it doesn't always yield the highest returns. I also enjoy nice things in life and don't sock away every penny and eat ramen.

For example, get a little raise? Say $500/month? Put 200 against the house note/car notes whatever, $100 for other spending if needed, $200 to brokerage.

Spread it around and feel good about yourself.

I will say though, with a 2.5% mortgage it's hard to want to put money towards it but… a couple hundred extra a month could end up meaning the mortgage is gone 3-5 years earlier. Not bad.