Last month (January):
Years left: 1.166667
P =$1,147.93, I =$66.47, Escrow =$809.48
This month (February):
Years left: 1.083333333
P =$1,152.47, I =$61.93, Escrow =$809.48
Amount saved from prepayment: $0
Because of my addictive personality, I’m not allowed to join any forums. That doesn’t mean though that I don’t occasionally read fora even though I can’t participate. Occasionally I have to say something, and since I’m not allowed to join, the something gets to spill over onto the blog.
In this case the forum in question is Mr. Money Moustache’s, and the “someone is wrong” thing is a few misconceptions about mortgages. I know we’ve written about them before, but they obviously bear repeating!
- Mortgages work differently than student loans or credit card debt because they keep the payment the same each month and just remove months off the end with pre-payments. That means that payments early in your mortgage are worth more than payments later in your mortgage because the mortgage, unlike other investments, doesn’t reamortize each month. That means the amount you’re saving from pre-paying is different depending at what point you’re at in the mortgage. You can see this by looking at an amortization spreadsheet, like this one from GRS.
- A common misconception is that you are increasing your risk pre-paying the mortgage because you can’t get the money back in an emergency unless and until you pay the entire thing off (and thus finish your mortgage payments). That’s not actually true. If you prepay your mortgage, you can, in an emergency, re-cast/re-amortize for a small fee (usually ~$250) and get lower monthly payments by lengthening the amount of time that you continue paying on the mortgage. For example, right now my mortgage payment is a little over $2000/mo with 1.08333 years left. If I re-amortized, my payment would be just a little bit more than what I’m paying for escrow, but I would be paying that sum over 13.4 years instead. (And I have to pay for escrow even if the mortgage is gone!) All that pre-payment means that in an emergency I can cut my monthly required payment, even though there’s still time left on the mortgage. You don’t end up with quite as much ready cash so if you’re expecting an emergency you should keep it, but if the emergency is a low-probability event that may happen after years of pre-payment, you can likely recoup enough in lowered payments to get you through for quite a while. [note that if you have a nonstandard mortgage, the rules may be different — you may not be able to as easily reamortize an adjustable rate mortgage. Check with your lender if this is a concern. ]
Are there any money misconceptions that bother you? What do you do when someone is wrong on the internet? Do you belong to any fora?