|i heard that if you had a new boat costing 40000. |
w/ a 15 year note that you could make 1 extra payment a year and have it payed off in 9
is there any truth to this . weres the math
|just about any mortgage or loan calculator will let you play with the payments to see how it affects the term of the loan. |
there's one on this site that i think it pretty easy to use... www.801010.com go to 'calculators' and then 'monthly payment calculator'. change the loan amount, interest charged, and how many years. then there's a spot for pre-payments...monthly or annual.
edit: 1 extra pymt a year cuts 1 year off the loan. an extra $100 a month cuts 4 years off.
(Message edited by salty87 on October 28, 2004)
|$40k for 15 years at 6% is a payment of $338. To get to 9 years you need to make a payment of $480 or an extra $142/mth. This is more like 5 extra payments a year. |
|By JT (aidan) on Thursday, October 28, 2004 - 9:43 pm:
|I was told the same thing , 1 extra payment compounded interest would = paying off boat 7 years early|
|Paying one extra payment a year won't cut your loan that much. Use the calculator Salty87 linked to and you'll see that a 40k loan for 15 years (I used 6% as a rate) will yield a monthly payment of 338.00/month. If you added an extra payment of 200.00/ month }and the term will be reduced by 6.4 years.|
|Maybe it was an extra payment every single month. If you double what you pay, it would take your loan from 15 years to 6 years.|
|you have to realize how the financials work to understand why a slight increase in your payment can equal a much earlier payoff. Look at it this way...if you have a $40k loan, and say a $350 pmt for a 15 year loan. with a loan of that length, your payments, especially at the beginnin are going almost all towards paying interest. So on your first payment, maybe $50 goes towards principle, the rest towards interest. if you pay an extra $50, you're doubling the principle you've paid off in the month. If you double your payment, you're now paying $300 towards interest, and $400 towards the principle. Even paying just a little extra every month helps cut down the term of the loan tremendously. |
Of course, as you get towards the end of the loan, and there's not as much principle left to pay, the interest portion of your payment becomes much smaller.
hopefully that all makes sense. My degree in finance is at least helping me figure out my budgetary needs!!
|I paid my BMW off in 4 years rather than 5 by paying and extra $50 a month. I put an extra $75 on my boat and I usually just pay them off when I get down around a grand. It really helps a lot to put a little extra down. My Discovery has an early payoff penalty of $150 bucks though that is negligible when you consider the interest you save. |
|You MUST instruct the lender to apply all extra payments directly to principal. They tend to be sneaky and apply overage to the next months intrest which will make hardly any difference to your term of the loan BE SURE TO SPECIFY. I learned this the hard way. |
|Do you have a spreadsheet program? It is easy to set up the amortization in a spreadsheet and play with the numbers and see for yourself. I would recommend doing this for all your finances anyway. Spend a little time seeing what will happen with various extra payment options and you will quickly understand what Tommy is saying. |
I think everybody should know where their payments are really going. I could send you a template if you like.
|If you have Microsoft Excel here is how to build an amortization template (how your payments work out over the life of the loan). |
I just found this template today so this thread was well timed.
|template attached |
|Some free templates from M$ |
|Another fact(so I hear) about cutting down at least part of the interest is to split your monthly payment into to 2 installments for that month. |
for example...Payment = $400, end of week 1 of the month and the end of week 3 in the month, pay $200.
Payment for the month ='s $400, but keep in mind, interest is compounded daily, so paying half of your payment in 2 installments help's w/ the fact of the interest compounding daily. Thus, long term, lowering what you owe in interest.
|Making a 1/2payment every two weeks = making 1 extra payment a year. On a term/amortized loan the interest is not compounded daily. It is factored into the payment each month for the term of the loan. Thus making a 1/2payment every two weeks instead of once a month for an entire year will pay more principal down, which shortens the term of the loan, which lessens the total interest dollars due.|
|By cdm (cdm) on Sunday, November 21, 2004 - 4:12 pm:
|Yes bi-weekly payment plans do reduce the term of a loan..... |
52 weeks per yr.
If you make bi-monthly payments, 2 per month you will make 26 payments per yr. 26-24 = 2 extra 1/2 payments per yr = 1 extra full payment per yr. You will pay off the loan early! super.. I bet you never keep the boat that long!!
BUT... there is a better way!!
Regardless the best option is to hold onto your money, keep it liquid. Your next months payment is always the same (fixed rate loans) and paying more per month will never lower your monthly payment. How secure is your job? What if you lost it? Would you want that priniple reduction back? How important is that extra payment now? Its better off in your pocket! Instead save and invest your money and the rate of return will out weigh your principle reduction every time... Do the same when it comes to your home loan too... Invest in something with a rate of return, something that makes you money, not something that will save you money in the long run!!
or/ on the flip side...
If you really like to make principle reductions...
Look to see how you can use the equity in your home to your advantage. People tend to sell or refi in 3-5 yrs. Look into interest only loans. Someone with a 30 yr fixed will make very little priciple reduction in the first many yrs. Refi into an interest only arm and make your normal 30 fixed rate payment, you will make huge principle reductions monthly. First lien Interest only HELOC's depending on your situation could be benifitial too.. often ~ 80% LTV prime - .25 = 4.75%
Example: $50000 loan @ prime - .25% = 4.75%
50000 x 4.75% / 12 = $197.92/ month intest only. Make a 400/month payment towards your HELOC and reduce the priciple ~ 200/ month. Remember there is no such thing as a mortgage burning party anymore. Old Farmer John, who has been paying for 30 yrs on his mortgage did just what his bank wanted him to do. They took him to the farm and he payed more than double!! Who will outsmart Farmer John?? Remember your home will always appreciate, your boat will always be a liability, think of ways of reducing your liability.
I quess that ended up to be more than I had planned on.. my $.02...........
|By tre (tre) on Monday, November 22, 2004 - 2:04 pm:
|Home Equity Line Of Credit. |
|Nope that would only drop you to a 13 yr 4 month loan |
use this calculator to figure it out best one out there www.jeacle.ie/mortgage/