Re: bi-weekly loan payments

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: bi-weekly loan payments
Date: Tue, 8 Dec 1998 18:49:38 -0500

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>The slow growth in the early years of any investment can't offset the high
>cost of interest in the early years of a mortgage.  You get more bang for your
>buck prepaying a mortgage loan.

I disagree.  The interest isn't a "higher cost" earlier in the mortgage,
there's just more of it because the initial balance is high.  Similarly,
the investment doesn't grow any more slowly at the beginning, there's
just less earnings because the initial balance is low.

If your mortgage is at 6.5% and you prepay $100, you have a rate of return
of 6.5% on that $100.  If you invest $100 at an after-tax rate of 9%, you
have earned 9% on that $100.

If your mortgage was at 6.5% and you could get a *guaranteed* rate of
return of 9% on your investments, you would be irrational if you did
anything but pay your mortgage off as slowly as possible so that you could
capture the 3.5% spread for as long as possible.

However, unless we get a huge spike in long-term interest rates, you're
not going to get a guaranteed return of 9% anywhere, which leads to...

>Frankly, I'd rather not have the risk of forclosure when the balance of
>my investments can't pay off the balance.  I'll

Now this is an eminently valid point and a legit argument for prepayment,
unlike the first paragraph.

Rich Carreiro
rlcarr@animato.pn.com
P5-100/RedHat Linux 4.2

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