Re: bi-weekly loan payments

From: Bill La Mar <billamar@cland.net>
Subject: Re: bi-weekly loan payments
Date: Tue, 08 Dec 1998 16:56:28 -0600
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JT144@aol.com wrote:

> Bill La Mar writes:
>
> << An even faster way to own your own home is to invest the extra dollars
>  each month into an investment such as Vanguard 500 index fund.Because of
>  the magic of compounding it will build up much faster than the increased
>  equity in the home. Besides if a person loses a job the equity in the
>  home is worthless until such time as the home is sold. If you can get
>  mortgage money for 5% after tax and invest money for 10% after tax you
>  are using one of the keys to financial security that has worked forever.
>  This is successfully using the financial perpetual motion machine.
>  People who have used the nine Keys to Financial Security have
>  consistently become wealthy.
>   >>
>
> Your example sounds great.  Instead of paying off a debt at 5% net, invest at
> 10% net. Good in theory.

What is the problem with the practice of IF you are making more than you are
paying for borrowing the money. If you have a 30 year $100,000, 7.5% mortgage; the
principal and interest payment is $699.21. If you pay an additional $58.27 per
month and the mortgage company receives the payment by the first of the month (no
15 day grace period) the mortgage will be paid in 280 months. If the payments of
$699.21 are made using the normal 15 day grace period after 280 months the balloon
to pay of the mortgage is $43,916.86. You also find that if you have been
investing the $58.27 every month at 10% net per year you have $64,421.22 available
to pay off the mortgage. If the mortgage is paid off and $657.48 is added to the
investment for 80 months you will have $114,176.89. If you continue making the
mortgage payments of 699.21 and add $0 to your investments for 80 months you have
an investment balance of $125,129.26. If  you continue making the monthly
investment of $58.27 the balance is $131,718.63. BTW 7.5% mortgage is
approximately 5% after tax for most of us.

> Your plan though will force people to overpay for
> their homes. A 100,000.00 house with a 30 year loan could easily end up
> costing 300,000.00.  Many people are finding out that they cannot sell their
> homes for enough to compensate them for the money they spent in interest,
> nevertheless make a profit.
>
> A better plan might be to prepay on the house and get the debt paid off.  THEN
> invest the money you no longer have to spend to the bank.

The figures above do not show though do they? The above figures will be even more
dramatic if each year when you figure your tax you add the amount to the
investment that the tax man lets you keep because of the mortgage. The first year
tax savings alone will increase the investment $22,264.60 at the 280th month and
$43,245.89 at the end of 360 months.

> Results:
> 1). You are much more likely to profit from your home if you reduce the
> interest paid.

> 2). You are in a better position financially and cash flow wise without a
> mortgage.
> 3). Prepayments produce savings that are guarranteed and tax free.

I have heard this many times, but have never been able to see it work in practice
or even on paper when the options are examined.

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.

Sounds good. Show me in figures how it works.

> Frankly, I'd rather not have the risk of
> forclosure when the balance of my investments can't pay off the balance.  I'll
> stick with prepayments, as i've already saved $110.000.00 in six years time.
>

I do not understand how prepayments can hold off the threat of foreclosure until
you have paid off the mortgage. While money in a seperate investment account can
certainly hold off the time of foreclosure.

BTW if you will also get a new 30 year comparable mortgage about every 10 years
and continue making the $657.48 mortgage and investment payments you can increase
the financial bang for your buck. You continue getting a better tax break on the
payments that you are making.

Bill La Mar




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