Please help me with the math !

14 not 14th

Here are the assumptions I've used to do the calculation: a 5.5% interest rate; the 2 additional payments at the same amount as the required monthly payments; and the 2 payments are made in the last two months of the year.

The result is you will pay off your 30 yr mortgage in 261 months or 21 years and 9 months.

It changes depending on when you make the additional payments and the interest rate you are getting.

Sledgehammer. The point is to not to prepay your mortgage but to invest the difference into something that yields a greater after tax return than your mortgage. Sorta off topic.

Thanks Dirtyrotten.
I hear what you're saying W67th, but since on the 1st years of a mortgage you're paying mostly the interests, wouldn't it make more sense to pay back as much as you can to try to reduce the principal as much as possible?

Hi Sledgehammer,
Looking at your post.....here is another idea for you:
If you can get a good deal on a 30 year fixed 10 year Interest only mortgage, and on top of the interest only payment pay a few more hundreds of dollars a month (which will be exactly like paying the fully amortized payment). You will finish a 30 year loan faster than making 2 extra payments.

In addition to that your monthly payment will go down every month since I/O mortgages are adjusted on a monthly basis.

You can find lots of different types of mortgage calculators at http://dinkytown.com/mortgage.html if you want to see how different principal payments change the payoff and interest savings.

shaimegiddo, I've considered that same thing; it'd be a nice recast down after 10 years. I was under the impression, though, that they are rare these days and that the interest rates are so much higher it's not worth it. Do you know of a good source?

You'd do better if you just took out a shorter mortgage in the first place. That way you'd get the benefit of a lower interest rate.

I've just used 15-year fixed mortgages in the past for this very reason.

sledgehammer... it's irrelevant bc 1) you get most tax benefit in early years (that's why in commercial RE, owners always re-fi when principal becomes a large % of payment); 2) Compounding works both ways, little saved up front grows (esp. if rate of return is greater than cost of capital) 3) bc of the huge push for "home" ownership and all that entails, mortgage is by far the most leveraged and cheapest cost of financing on the PLANET and can almost always be beat by the market (i.e. what'd you'd earn in the market).

Topper, if you put aside the differential btwn 30 and 15 yr (and not buy ferragamos, but actually invested it well), I can almost guarantee you, you'd be better off.

The key here is 1) know your horizon, 2) what part of RE cycle you are in 3) know thy financial self....

Topper, that does make sense, but I wouldn't want to be tied to the 15 yr's higher monthly payment should my income change for the worse. The 10 yr fixed rate i/o seemed good (like having a built-in refi in yr 11 when paying down the principal well) when it was priced an eighth or even qtr above the straight 30. Now, not so much.

w67thstreet, good points to consider as well.

further to the analysis.... I'd always take a 100 yr mortgage if that was an option (given the leverage and cheap cost of home mortgages, or course) and invest the differential.... but here we go, down the slippery slope... if we started allowing 30, 40, 50, 60, 70, yr mortgages and laxing of credit requirements => RE Bubble 2.0.

My BIG question to the nimrods in the MBS desk and cheating/holier than thou politicians is: What is SO special about HOME per se that requires gov't intervention and lower cost financings? Does it in the end "benefit" our little blue planet?

Interesting concept, tenemental.

Do you know what the current spread is?

All in all, though, I probably would prefer the 15-year vanilla fixed rate mortgage. Lower rate. Conservative. I (may) have no mortgage in 15 years and fully own.

Yes, the 30-year might give you some extra flexibility in the event of a job loss. Kind of depends upon your unique circumstances and whether you've got sufficient other resources to help ride out such periods.

okay okay students... last math problem.

person A: has $1MM mortgage and $1MM in cash
person B: has $0

who is richer?

this is great b/c your answer will depend on your profession and bull/bear leanings :)

person C

Person A have to means to invest his million and use the positive return to pay off some of his mortgage cost?

"has the means"

ManRE... yes C, neither is richer. They are equal, but if you are Ericho75/El_P/borker... I just assumed you'd assign a "positive" value to owning :)

If you believe RE will go down, B is richer... that would be me, the renter...

RE will go down, then it will go up, then it will go down, then it will go up...

Person with 1MM mortgage and 1MM in cash is richer. If you take the 1MM in cash and you pay off the mortgage, you own the property no matter how much it goes down. Unless it goes to 0, you will always be richer than a person with $0.

Assuming B doesn't own and all other things being equal, A is better off. Unless the property has a negative value (which is unlikely), he can pay off his mortgage and would have the same amount of cash as B but he owns the property (which is a positive value).

Assuming both A and B own property (lets assume the properties have the same current and future value) and all else being equal, person A is still better because he has leverage. He's got a million in cash to do what he will. Unless his interest rates are in the double digits, I'd be person A over person B anyday.

Topper, I haven't talked to a mortgage broker about it in a while, but Bankrate has only one bank, BOA, offering a 30 yr fixed i/o in the New York Metro area. The APR is 6.41 w/ no points. The straight 30 yr fixed/no points from BOA is 5.91. The est payment is higher on the i/o than the straight loan.

"okay okay students... last math problem.

person A: has $1MM mortgage and $1MM in cash
person B: has $0

who is richer?"

I would argue that A has a higher net worth....he/she not only has a house, a $1mm cash account and a $1mm liability but he/she also holds a put on the house....put the house to the lender and walk away any time the house goes underwater...this assumes the cash is carefully segregated legally.

Lmao. Assume it's company a and b. Now which company is more valuable. The laws of cash flow don't change for 'individuals' versus companies. Unless you 'assign' values to emotional / non financial aspects, and that's what you are doing with home ownership.

I think the confusion is your definition of richer.

Your math all assumes steady income. What if person A has $1MM in cash, no home and reduced income - tax benefit irrelevant? Buy house with cash and live for free? Or live with some cash and mortgage to pay? Or rent, of course.

w67thstreet, $1mm in cash is just that. You give a homeless guy $1mm and tell him he must pay that back in 30 years at lets say 6% interest rate. Compare him to another homeless guy who has $0 in cash and tell me who's richer.

dirtyrotten... and if he earns 5% on his $1MM in cash for 30 yrs?

tenemental - a good source would be me :) ....I'm a loan officer.

You are correct - it's a bit tougher with the Interest only these days but a very good option to consider.

my email is shaimegiddo@gmail.com if you have any additional questions.

Good luck.

Assuming all else is equal, who is richer? Person A who has a fully paid 1MM home or person B who has $0?

w67thstreet, even if he earns on his $1mm, he is still better off. The other dude has 0. he can't buy anything with 0 in cash. Person A may be in debt but at least he's living now. Person B may never be in debt but has nothing.

it makes so much sense........

I'm more amazed that 1 out of 2 isn't in foreclosure....

person C, the male porn star that makes $500K/yr having sex...

w67thstreet, Assuming all else is equal, who is richer? Person A who has a fully paid 1MM home or person B who has $0?

okay bobbyflay. You assume a "home." Howz about a "boat' where the slip fee is $500/month, the thing is depreciating like mad, and #2 diesel needs new head job....

NOW whoz richer bobby?

Say the person has 2MM and no income. Pay cash for a home? Can this person even get a mortgage?

not getting your question. all they have is $2 million?

okay bobbyflay. You assume a "home." Howz about a "boat' where the slip fee is $500/month, the thing is depreciating like mad, and #2 diesel needs new head job....

That is a bit different but person A can still use the 1MM to pay off the debt on the asset and immediately owns an asset that he can sell. He might lose 50% of his 1MM but he still has 500K where the person B still has 0. If you are defining richer as cash flow and not net worth, then yes, person B will be "richer" while person A holds the mortgage on the asset. However, as soon as person A sells the asset at any price, he is substantially "richer" even if it was a terrible investment.

Here's the question: hypothetical person has sold home and has money in investments etc but little/no current income. Plenty of cash to buy something nice. Intent to live 10 years and then move to nursing home or jump out a window. Buy with cash or try to get a mortgage (which will have to be paid out of income from investments?) Could such a person even qualify for a mortgage?

Or rent for a year? Or rent forever?

Two different questions...one is the rent vs buy question which has gotten quite of discussion on this Board (in fact is THE QUESTION)

Second one is should real estate be leveraged or not when purchased and I think all the finance theory I've ever studies sez get as much leverage as you can on the theory that it's rediculously cheap (especially right now with FHA conforming loans at 5% or so) and the borrower gets a free put to the lender if things go very poorly...assuming as I said earlier that you bankruptcy proof your cash hoard.

But the rent vs buy question is of course much more fundamental....I guess if you're only 10 years away from a nursing home, I'd go with rent...certainly doesn't sound like getting your kids into the ideal K-8 is a motivation at this stage in life....

And if you think you need some real estate exposure in your portfolio, buy a share or two of a Manhattan REIT....pretty cheap right now

My two cents...