im not grasping the concept of prepayment savings from the point of view of the borrower. if i borrow 100k at 5% and pay it off fully amortized over x number of years, i’d have to pay back 105k by maturity’s end. some time later, the interest rate drops, now i take out a slightly less loan, say 90k @ 4%, effectively required to pay back 93.6k. i still have to pay off that 105k with 93.6k. where are the cost savings when i prepay?
Except you don’t have to pay off the 105K (of course it’s way more than that in total payments). If you borrow a 5% mortgage amortized over 30 years, most of your early payments are just interest (like > 90% of the payment) then as years go by (they do, it sucks) the payment is more principal than interest. But each time you make a payment, the principal on the loan drops. That amount is called the pay-off amount and you can get it by pressing #1 on your touchtone keypad now. When you refi two things happen - you get a new interest rate (hopefully lower) and you extend the term of the loan. That means you might get much smaller monthly payments.
Gotta be young bucks on this board. I am all too familiar with my mortgage.
Are you getting wistful about these kinds of questions yet? I remember asking my buddy when I was 25 about how mortgages work. I wish he had told me that if you default on them the Fed will pick up the payments.
Yeah that would have been valuable information. I could have done a lot of cool things if I didn’t have to pay the mortgage.
now im even more confused. 1. if i borrow 100k @ 5% how can it be more than 105k payoff balance? 2. where are the cost savings from taking out a loan at a lower interest rate? we were paying mostly interest in the first loan so the outstanding principal balance is still there…
pacmandefense Wrote: ------------------------------------------------------- > now im even more confused. > > 1. if i borrow 100k @ 5% how can it be more than > 105k payoff balance? It will never be more than $100K (assuming you have a normal amortizing mortgage and don’t miss payments and the Fed doesn’t pay for the ones you miss). But the total payments for a 100K 30-yr amortizing loan are probably $250K or something (too lazy to calculate it). > 2. where are the cost savings from taking out a > loan at a lower interest rate? we were paying > mostly interest in the first loan so the > outstanding principal balance is still there… If you keep the payments the same, more of your payment goes to principal so you pay off your house faster. Or you can keep the same schedule and lower the monthly bill.
$193,256 akktuallee.
JoeyDVivre Wrote: ------------------------------------------------------- > pacmandefense Wrote: > -------------------------------------------------- > ----- > > now im even more confused. > > > > 1. if i borrow 100k @ 5% how can it be more > than > > 105k payoff balance? > > It will never be more than $100K (assuming you > have a normal amortizing mortgage and don’t miss > payments and the Fed doesn’t pay for the ones you > miss). But the total payments for a 100K 30-yr > amortizing loan are probably $250K or something > (too lazy to calculate it). > > > 2. where are the cost savings from taking out a > > loan at a lower interest rate? we were paying > > mostly interest in the first loan so the > > outstanding principal balance is still there… > > If you keep the payments the same, more of your > payment goes to principal so you pay off your > house faster. Or you can keep the same schedule > and lower the monthly bill. thanks. can someone link me to a mortgage calculator/schedule so i can see how the calculations are made and how the paydown looks like. i see the rounded negative slope in the Stalla text but i want to see the nitty gritty math portion.
Or just use the PMT function in excel and model it yourself. Or use the CUMPRINC function. Edit: They really should have come up with a different name for that function. Maybe CUMQUEE.
your calculator will do it to. Look to the manual.
Use excel, that way you can set up a full amorization table to really get the concepts down. Then it will make sense why it is all interest in the early years and all principle in the end.
That is good advice. ^